Daewoo Shipbuilding Posts Quarterly Loss on Offshore Costs

  • Challenging times continue for Korea's big shipbuilders
  • Company says earnings to improve from the fourth quarter

Daewoo Shipbuilding & Marine Engineering Co., the world’s second-largest shipbuilder, posted its second straight quarterly loss as a slump in oil prices increased costs for its offshore operations.

The third-quarter loss was 1.35 trillion won ($1.2 billion), compared with a 35.5 billion-won profit a year earlier, the company said in a regulatory filing Tuesday. That’s wider than the average 95.2 billion-won loss from eight analyst estimates compiled by Bloomberg. In the second quarter, Daewoo Shipbuilding posted a loss of 2.3 trillion won, its biggest ever.

Customers increasingly are asking global shipyards to delay delivery of ships and offshore rigs as weaker economic growth and sluggish oil prices make it difficult for them to pay for the projects. Creditors of Daewoo Shipbuilding plan to announce Thursday on how much money they will lend to the shipyard to help improve its cash flows.

“Daewoo Shipbuilding appears to be getting over its biggest challenge,” said Lee Jae Won, an analyst at Yuanta Securities Korea in Seoul. “The real task for the shipyard will be to meet its reform plans. Fourth quarter earnings could be far better than the third quarter’s.”

Offshore Troubles

Daewoo Shipbuilding, Samsung Heavy Industries Co. and Hyundai Heavy Industries Co., the world’s three biggest shipyards, moved toward building floating facilities for drilling and production when the global financial crisis hit ship orders. Now they’re pulling back from that business after the drop in oil prices since last year prompted companies such as Royal Dutch Shell Plc and Petroleo Brasileiro SA to cut spending.

Daewoo Shipbuilding’s results reflected losses from a contract that was cancelled in August after an unnamed client in the Americas failed to make payment on a drill ship under construction. The company also said Tuesday two drill ships it’s building will be delivered a year later than originally agreed.

“The company reflected additional losses the creditors found in their due diligence, as well as loss from its overseas subsidiaries,” Daewoo Shipbuilding said in an e-mailed statement. “Earnings should start to improve in the fourth quarter if the creditors provide funds as planned.”

Daewoo Shipbuilding’s operating loss in the third quarter was 1.22 trillion won, compared with a 135 billion won profit a year earlier. That exceeded analysts’ estimate for a 93.6 billion-won loss on average, according to Bloomberg data. Sales fell 25 percent to 3.16 trillion won.

Orders Deferred

Daewoo Shipbuilding isn’t the only shipyard feeling the heat. Samsung Heavy has accepted requests from customers to defer deliveries of six drill ships, while a Hyundai Heavy client cancelled an order for a semi-submersible rig.

Some offshore projects currently under construction have yet to be hired for any drilling or production jobs when they’re delivered to their owners, raising the possibility that more orders could be delayed, according to Shinyoung Securities Co. in Seoul.

Results for the other members of the Big Three shipbuilders were mixed. Samsung Heavy on Monday reported third-quarter net income of 53.7 billion won and said its business appeared to have turned a corner. Also Monday, Hyundai Heavy posted a net loss of 434.1 billion won for the quarter.

Worst Performer

Daewoo Shipbuilding is the worst-performing stock on the Kospi 200 index this year as project delays have forced it to take on more debt. The shipbuilder is selling non-core assets, reducing its operational presence at a money-losing Romanian shipyard and cutting its workforce to help raise cash.

Shares of Daewoo Shipbuilding gained 2.4 percent to close at 7,130 won in Seoul before the earnings announcement.

Korea Development Bank and Export-Import Bank of Korea started reviewing Daewoo Shipbuilding’s management and long-term business plans in July to find out how much money the shipyard might need. Daewoo Shipbuilding is selling its headquarters building, a golf course and wind energy business to raise cash. The shipyard’s labor union submitted a letter to the creditors, pledging to work with the company on restructuring.

The creditors will announce a support package for Daewoo Shipbuilding that could be as large as 4.3 trillion won, Yonhap reported, citing Korea Development Bank.

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