Shiv-Vani Oil & Gas Exploration Services
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs480
Current market price: Rs370
Stepping on the gas
Key points
- Largest player in onshore drilling and seismic survey services: With a fleet of 25 onshore drilling rigs and six seismic survey crew, Shiv-Vani Oil & Gas Exploration (SOGEL) has emerged as the largest onshore service provider catering to the needs of oil and gas exploration companies. The augmentation of assets by the company is well timed in the industry upcycle. The heightened exploration activity has resulted in severe shortage of resources with service providers, leading to firming up of day rates (or billing rates per km in case of seismic survey) for various services.
- Healthy order book provides growth visibility: In addition to the favourable business environment, the existing order backlog of Rs2,950 crore itself provides a strong revenue growth visibility over the next two years. Almost 70% of the order backlog (excluding the Oman order) is executable over the next 24-30 months. The company also has a healthy order pipeline with planned bids worth over Rs5,000 crore for global tenders over the next few quarters. Moreover, to further consolidate its leadership position and effectively tap the huge opportunity, the company has planned an aggressive capital expenditure (capex) of around Rs1,000 crore over the three-year period CY2006-09.
- Margins to improve: SOGEL has reported a healthy operating profit margin (OPM) of 35% in CY2006, which is expected to improve by 300 basis points to 38% by CY2009. The improvement in its OPM would be driven by higher realisation (day rates or billing rates per km) and more efficient utilisation of its assets.
- Attractive valuation: The consolidated revenues and earnings are expected to grow at compounded annual growth rate (CAGR) of 60.3% and 72.7% respectively, over the three-year period CY2006-09. Despite the robust growth prospects, the stock is available at attractive valuations of 11.3x CY2008 and 8.5x CY2009 earnings estimates. We recommend Buy call on the stock with a price target of Rs480.