Aban Offshore

The stock of India’s largest offshore oil services company, Aban Offshore has been on the upswing since May. The stock touched a peak of Rs 1,144 in June giving investors nearly three times their investment in just one month. Though the stock came off nearly 50 per cent from the highs subsequently, it has since then recovered most of the lost ground and is currently trading around Rs 1,000 levels. The heightened activity in the stock is the result of newsflow indicating that the company has been able to restructure its $3.2 billion (Rs 16,000 crore) of foreign currency debt. Last Friday, the company also announced its intention to raise funds through global depository receipts or placement of equity to institutional investors.

The acquisition of Sinvest, a Norwegian oil drilling investment company three years ago, for an enterprise value of $2.2 billion has led to a large amount of debt on Aban’s books. High day rates for oil rigs in 2007 and first half of 2008 on the back of rising oil prices meant robust profit margins and cash flows. With the oil prices coming off from their $145 per barrel highs in July 2008 to under $40, and now to around $65, has resulted in lower demand for offshore vessels and idle assets for Aban. Of the total debt, the company is due to pay about $435 million (Rs 2,175 crore) in 2009-10. A third of this ($142 million, Rs 710 crore) is to be paid by the end of this calendar year. Considering that the company is expected to generate cash of around $250 million (Rs 1,250 crore), it will still be short by about Rs 1,000 crore. The company has reportedly been in talks with Indian banks, which own three quarters of Aban’s debt, for a two year moratorium on principal payment. Analysts believe that the repayment flexibility is likely to come with stiffer interest rates. Little wonder, the company is considering options like fully convertible bonds, ADRs, GDRs and qualified institutional placement of equity, or even listing of its Singapore subsidiary, to raise long-term funds and to make good the shortfall.


Idle assets The Sinvest acquisition expanded Aban Offshore’s fleet and the company currently has 20 drilling rigs and one floating production unit. While its entire Indian fleet of seven rigs is deployed, an equivalent number belonging to its Singapore subsidiary is lying idle. Although there has been some improvement in demand for rigs in the last 2-3 months, the day rates of offshore (Jack up) oil rigs have tumbled by half to around $100,000 currently from a year ago indicating that demand for jack up rigs (15 of the 20 rig fleet) is still weak. Analysts say that the company is likely to place its two deepwater assets on contract over the next two months which should ease the pressure on cash flows as they fetch about $400,000 per day. The outlook in the short term, however, does not look too good. The world rig count at 1,987 is down 42 per cent from year ago levels. With the fortunes of the sector linked closely with crude oil prices, any sustained improvement in the prices which are hovering at around the $60-$70 mark would help improve utilisation rates, and hence profitability.

Financials

High day rates in 2008-09 helped Aban record a 350 per cent increase y-o-y in net profits to Rs 554 crore. The topline also grew by a hefty 50 per cent to Rs 3,183 crore. The 2008-09 performance was marred by an impairment charge of Rs 151 crore in Q4, leading to higher depreciation and losses of Rs 130 crore for the period. Considering that the company has a debt to equity ratio of around 11 and a squeeze on cashflows, the going could get tougher. Analysts say that the restructuring of debt where the company gets favourable terms would hinge on improvement in cashflows. Unless there is a turnaround in operational parameters (higher day rates and full utilisation of fleet) and macroeconomic factors (price of crude oil), it would be difficult to place equity, and even if it does, Aban will have to contend with asignificant dilution. Due to idle ships, analysts estimate that the company is likely to post losses in the first half of the current fiscal. A Morgan Stanley report says that the company will make losses in the first half of 2009-10 of Rs 286 crore on revenues of Rs 671 crore. The company made net profits of Rs 111 crore in the same period in FY09 with revenues at Rs 749 crore.

Conclusion

At current price, the stock is trading at 7.65 times its estimated 2009-10 earnings of Rs 130. Considering that the stock has made considerable gains over the last couple of months and the difficult operating environment in the shortterm, investments can only be considered on sharp corrections.