Aban Offshore

Increasing spends on oil exploration and production activities, driven by the surge in global crude oil prices, have put Aban Offshore, the country’s largest offshore oil rig service provider, in a sweet spot. Investors looking to play the high oil price scenario can consider investments in the stock at current market price. Aban’s large and relatively young fleet with an optimal mix of short- and medium-term rig contracts lend it strong revenue visibility over the medium term.

Besides, the current market valuation also makes a compelling case for fresh investments in the stock. At the current price of Rs 2992, Aban trades at about nine times its likely FY-09 per share earnings on a consolidated basis.

Investors, nevertheless, may need to temper their expectations on the returns front given the volatility in the broader market.
Strong demand environment

The surging oil prices combined with the tight supply of rigs worldwide, are likely to keep the demand and, hence, rentals for oil rigs upbeat over the next year. Aban Offshore, with a fleet size of over 20 assets, appears well-placed to reap the benefits of this strengthening demand trends in the offshore industry. Besides, with a pool of assets that is the largest among the Indian offshore service providers and even compares favourably against some of its global peers, Aban appears the best investment bet in the sector. While there are concerns that rising charter prices for oil rigs may begin to taper as new capacities hit the market this year, Aban may remain relatively shielded from any such moderation in rig rentals. This is because it has a healthy mix of medium- and short-term contracts for its rigs.

While the short-term contracts may suffer from the softening trends in rentals the company’s medium-term contracts that have been sealed at attractive rates would continue to rake in sufficient cash flows over the next few years. That the earnings visibility that Aban enjoys is mainly attributable to the medium-term horizon of its contracts only reiterates this.
Addition of rigs

The company proposes to further add to its existing rig capacity; four jack-up oil rigs are scheduled to be delivered to Aban over the next year or two. Besides that, Aban recently added semi- submersible rig “Bulford Dolphin” for a consideration of $211 million. Renamed ‘Aban Pearl’, this rig is currently under repair and is expected to be ready for use in a couple of months.

With the demand for deep offshore drilling expected to remain high, this rig is likely to get contracted at competitive rates. Aban’s other two drill ships — Aban Abraham and Deep Venture (50 per cent stake) — which have been deployed at attractive rates also lends credence to the firm rental trends in deep-sea offshore drilling.
High gearing

The company had in 2006-07 acquired the Norway-based Sinvest ASA at about $2.2 billion. While that had vaulted Aban into the league of the top ten offshore rig players in the global arena, thanks to Sinvest’s global clientele and large pool of assets, the acquisition also burdened the company with a lot of debt.

Aban proposes to retire a significant chunk of this debt by listing its Singapore subsidiary. The refinancing of its debt structure by listing the subsidiary would help prop up Aban’s earnings. However, the same has been put on the backburner, considering the waning appetite for primary market offers globally.

Till such time, the debt burden would continue to eclipse the company’s earnings growth over the next two-three years. This, however, is no cause for immediate concern since Aban’s assets (both the current ones and the new assets that are likely to become operational in the current fiscal) may generate sufficient cash flows to service its debt.
Financials

On a standalone basis, the company’s overall performance for the year ended March 2008 continued to be on a strong footing. Aban reported a 31 per cent increase in revenues and 58 per cent growth in profit. Operating profit margins expanded by two percentage points to over 52 per cent.

However, on a quarterly basis, Aban’s profits dipped by about 29 per cent due to higher costs and interest expenses. The consolidated numbers of the company, however, are still awaited.

In terms of risk, any delay in either the delivery schedule of rigs or in deploying them, significant drop in rig rentals and lower-than-expected utilisation rates for the rigs pose a downside risk to Aban’s business.