Ventura Securities - Great Offshore

Ventura Securities report on Great Offshore:

Rising oil consumption leading to increased E & P activities augurs well for the offshore oil field services providers

On the back of increased oil prices and India’s policy to achieve National Energy Security, domestic E&P activities are expected to increase at a rapid pace. The rise in E&P is in turn expected to generate huge business for companies offering offshore oilfield services to oil & gas majors. GOL being a major player in the field is expected to reap benefits from the same.

Buoyant demand for OSVs, Rigs and Tugs to firm up day rates

The rise in E & P activities coupled with high demand and long gestation period of new builds has created a shortage of OSVs and led to an increase in their prices. Currently 11 PSVs and 28 AHTSVs are available in India as against the demand for 18 PSVs and 46 AHTSVs.

Timely Fleet expansion to capture the current E & P boom

To capture the boom in the E & P industry, GOL, in November 2006 embarked upon a USD 225 million (approx. Rs.10 billion) expansion plan for acquiring offshore support vessels over the next three years. Post expansion, the fleet size has increased from 33 in FY06 to 40 in FY07 and will touch 42 by April ‘09.

Rising oil consumption leading to increase in E & P activities augurs well for the offshore oil field services providers

Together with the country’s impressive growth, India has also become a significant consumer of energy resources. According to EIA estimates, India was the fifth largest consumer of oil in the world during 2006 with a usage of an estimated 2.63 million bbl/d (barrels per day) as against a production of merely 846,000 bbl/d. The combination of rising oil consumption and only a moderate rise in production levels has left India increasingly dependent on imports to meet consumption needs. To achieve National Energy Security, the government has introduced policies aimed at increasing domestic oil production and oil exploration activities. As part of this effort, the Ministry of Petroleum and Natural Gas crafted the New Exploration License Policy (NELP), which for the first time permits foreign companies to hold 100 percent equity ownership in oil and natural gas projects. Various private players were also awarded exploratory blocks in the six rounds of NELP bidding. NELP VI received an overwhelming response with 165 bids for 55 oil blocks in 2006. Global energy giants like British Petroleum, British Gas, Italy’s ENI, Petronas and French Multinational Total were among the bidders for the NELP VI (which covered 3.52 lakh sq. km.). Most discoveries of reserves in the past two years have been offshore, including the recent ones at KG, Cambay and Mahanadi basins.

With aggressive implementation of NELP programme, the domestic E&P activities are expected to increase at a rapid pace. This increased E&P activity in new oil & gas fields is expected to generate huge business for companies offering offshore oilfield services to oil & gas majors. GOL being a major player in the field is expected to reap benefits from the same. The number of offshore rigs operating in India has gone up to 42 rigs from the FY06 figure of 35. This is despite the fact that worldwide rig availability is difficult. Average rig utilization in India has been 95%.


Timely Fleet expansion to capture the current E & P boom

To capture the boom in the E & P industry, GOL, in November 2006 embarked upon a USD 225 million (approx. Rs.10 billion) expansion plan for acquiring offshore support vessels over the next three years. Post expansion, the fleet size has increased from 33 in FY06 to 40 in FY07 and will touch 42 by April ‘09. GOL has recently ordered one multi role support vessel to be commissioned in Q1FY10, and one jack-up rig to be received by Q3FY09. The total committed capital expenditure towards these purchases will be financed through a mix of debt and equity, in the ratio of 25% internal accruals and 75% debt. GOL is also open to buy second-hand vessels if the opportunity exists.

Valuation

The impressive fleet expansion and growing efficiency coupled with rising day rates and firm industry outlook will result in increased profitability for GOL. However, we expect the company to be on a higher growth trajectory once the Jack Up Rig and OSV will be added to the fleet in FY2009. We expect the company’s revenues & profits to grow at a CAGR of 12.7% and 22.1% respectively, over the next 2 years. At the CMP of Rs. 790, the stock is currently trading at 16.1x the FY08e earnings & 11.5x its FY08e EV/EBIDTA. Considering the robust demand for offshore services, we recommend the investors to ACCUMULATE / BUY on dips with a price target of Rs 950 over a period of 15 months.