Stock Review: Aban Offshore

   AFTER passing through a prolonged phase of high volatility, Aban Offshore is finally seeing some stability. It comfortably met its debt repayment obligations for FY11. It has $580-million debt repayment commitment in FY12 and is improving operational revenues, divesting assets, and diluting equity to bring down the burden.

   Aban Offshore's highly-leveraged acquisition of Norway's Sinvest in FY08 at peak valuations created a huge debt burden on its balance sheet. The ensuing economic slowdown made matters worse, as the company's profitability suffered due to stiff interest costs. At the end of FY08, the company reported a debt-equity ratio of 18, which came down subsequently, but was still high at around 6 in mid-FY11. Aban's consolidated debt-burden stood at Rs 13,262 crore as on September 30, 2010.

   The company has taken several measures to bring down its debt burden. In November 2009, the company had raised nearly Rs 700 crore through preferential equity allotment to qualified institutional investors. It also reduced its fleet size to bring down debt. During the March 2011 quarter, the company sold a 50% stake in Venture Drilling joint venture after it had to re-deliver a rig under management to its owners. The company earned nearly $100 million by way of these divestitures. Earlier in May 2010, the company had lost its semi-submersible Aban Pearl in Venezuela, resulting in insurance claims of $235 million. These events brought down Aban's fleet size to 18 from 21 a year ago. The recent spurt in crude oil prices across the globe has boosted the exploration industry's efforts to search for more oil. This has improved demand for drilling rigs and helped stabilise charter rates -- although they still remain 30-35% below their peak of FY08. After keeping some or the other assets idle through 2010, Aban Offshore now has all its 18 assets deployed on medium- to long-term contracts.

   All these factors are bringing in a much-needed stability to the company's business, which is a high cash flow generating one. For FY09 and FY10, the company generated over Rs 2,000 crore of operating cash flows each year. Considering the long-term asset deployment with around 4-6 renewals every year, the trend of high cash flows is likely to continue in future.

   Although the company doesn't intend to reduce its fleet any further, it has shareholders' approval to raise long-term funds up to Rs 2,500 crore by way of equity or quasi-equity. Once it meets the $580-million debt obligation for FY12, the annual repayments will fall to around $350 million per annum for FY13 and FY14 and further down to $250 million per annum from FY15 till FY19.

   While it means the company will be unable to add any capacity in coming 2-3 years, its ability to bring down debt, rein in interest costs, and improve earnings from the current asset base should be the positives to watch for. The company is currently trading around 7.7 times its earnings for the 12-month period ended December 2010, adjusted for extraordinary items.