The Aban Offshore stock has risen 26% in just one week following the news of US-Iran nuclear deal. The event has raised hopes of a recovery in exploration activity in the Middle East region, which should boost both, demand and realisations. Also, it is believed that once the sanctions on Iran are lifted, due to low risk perception Aban will be able to get access to low-cost funds from the US and Europe, helping it lower costs and better manage its debt.
For Aban, the event has come as key positive development given its high exposure to the Iran market. The company currently has 18 rigs, of which 7 rigs are deployed in Iran. If the outlook and operating environment improves there is a possibility that the company's financials should improve by way of lower working capital (lower debtors) as well as other expenditure relating to this market. Earlier, the Street had apprehensions about the recovery of payments from Iran leading to lower valuations. Currently, even after the run-up, at Rs 369, it is trading at just 3.25 times estimated earnings in FY15.
The development comes at a time when the Street is excessively worried about its highly leveraged balance sheet. At the end of September 2013, Aban had consolidated debt of Rs 12,991 crore which is 3.3 times its equity and was hurting its profitability. In first half of FY14, the company earned Ebidta of Rs 1,027 crore, while it incurred interest cost of Rs 558 crore or 54% of the Ebidta.
"All assets held by Aban Offshore, except FPU Tahara, continue to remain contracted. With a considerable improvement in the operational performance and increasing asset utilisation, we believe the cloud of uncertainty over debt refinancing would reduce," said Mayur Matani, who tracks the company at ICICI Securities in a note. Recently, the drillship Aban Ice was contracted at $170,000 per day to ONGC for period of three years. Higher utilisations and improvement in rig rates has also started to reflect in Aban’s performance. In first half of FY14, it reported 4.8% growth in revenues at Rs 1,890 crore followed by 50.3% growth in net profit to Rs 152.4 crore.
Improvement in the operational performance along with its efforts to curtail debts could lead to further re-rating of the stock. The company recently converted Rupee loans of Rs 2,200 crore into foreign currency debt at Libor plus 6%, which effectively costs 6.3-6.5% compared to earlier rupee rate of 14%. Analysts believe this alone could help save about Rs 154 crore annually in interests costs, which is equal to reported net profit in first half of current financial year.
Analysts are expecting overall interest cost to come down from Rs 1,172 crore in FY13 to about Rs 1,000 crore in FY14. This will have a positive impact on Aban’s earnings as well in the coming years. No wonder, analysts are expecting its net profit to rise from Rs 240 crore in FY13 to Rs 530-550 crore in FY15. Importantly, the cash flows will improve and that should allow the company to meet some of its scheduled debt payments in the coming years. Besides, the company also plans to raise funds to the tune of Rs 4,500 crore through various instruments including QIP of up to Rs 2,500 crore. Though the timing of such issuances and pricing is not known, the Street believes that if the markets remain conducive such initiatives could help in further reduction in debt without much worry on the dilution front. For now though, given its market cap of Rs 1,605 crore, at current levels it could mean sizeable dilution. Hence, the timing and pricing of fresh equity issuance remains crucial.
For Aban, the event has come as key positive development given its high exposure to the Iran market. The company currently has 18 rigs, of which 7 rigs are deployed in Iran. If the outlook and operating environment improves there is a possibility that the company's financials should improve by way of lower working capital (lower debtors) as well as other expenditure relating to this market. Earlier, the Street had apprehensions about the recovery of payments from Iran leading to lower valuations. Currently, even after the run-up, at Rs 369, it is trading at just 3.25 times estimated earnings in FY15.
The development comes at a time when the Street is excessively worried about its highly leveraged balance sheet. At the end of September 2013, Aban had consolidated debt of Rs 12,991 crore which is 3.3 times its equity and was hurting its profitability. In first half of FY14, the company earned Ebidta of Rs 1,027 crore, while it incurred interest cost of Rs 558 crore or 54% of the Ebidta.
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Thankfully, the company’s operating performance has been improving in the last two quarters and to some extent helping it deal with liquidity as well as meeting interest costs.
"All assets held by Aban Offshore, except FPU Tahara, continue to remain contracted. With a considerable improvement in the operational performance and increasing asset utilisation, we believe the cloud of uncertainty over debt refinancing would reduce," said Mayur Matani, who tracks the company at ICICI Securities in a note. Recently, the drillship Aban Ice was contracted at $170,000 per day to ONGC for period of three years. Higher utilisations and improvement in rig rates has also started to reflect in Aban’s performance. In first half of FY14, it reported 4.8% growth in revenues at Rs 1,890 crore followed by 50.3% growth in net profit to Rs 152.4 crore.
Improvement in the operational performance along with its efforts to curtail debts could lead to further re-rating of the stock. The company recently converted Rupee loans of Rs 2,200 crore into foreign currency debt at Libor plus 6%, which effectively costs 6.3-6.5% compared to earlier rupee rate of 14%. Analysts believe this alone could help save about Rs 154 crore annually in interests costs, which is equal to reported net profit in first half of current financial year.
Analysts are expecting overall interest cost to come down from Rs 1,172 crore in FY13 to about Rs 1,000 crore in FY14. This will have a positive impact on Aban’s earnings as well in the coming years. No wonder, analysts are expecting its net profit to rise from Rs 240 crore in FY13 to Rs 530-550 crore in FY15. Importantly, the cash flows will improve and that should allow the company to meet some of its scheduled debt payments in the coming years. Besides, the company also plans to raise funds to the tune of Rs 4,500 crore through various instruments including QIP of up to Rs 2,500 crore. Though the timing of such issuances and pricing is not known, the Street believes that if the markets remain conducive such initiatives could help in further reduction in debt without much worry on the dilution front. For now though, given its market cap of Rs 1,605 crore, at current levels it could mean sizeable dilution. Hence, the timing and pricing of fresh equity issuance remains crucial.