Aban Offshore, a homegrown offshore drilling company, recently announced it was recalibrating its debt from rupees to dollars in order to reduce its mammoth debt burden of Rs 14,000 crore, which is over four times its shareholders’ equity. Will this be enough to save the company from being swallowed into a financial black hole?
Aban was once the darling of investors. Its shares had touched a peak of Rs 5,017 in 2008, when its business was expanding rapidly. But, its fortunes began to change drastically soon after. The company piled up huge debt on its balance sheet and its stock was in tatters. The company’s shares closed at Rs 409.65 on BSE on Thursday. It has thus shed over 90 per cent value in four years.
What caused this rapid decline was perhaps its outsized ambitions more than anything else. Soon after its incorporation in 1986, the company had gone on a buying spree. In the 1990s, when many private companies in India were moving out of the drilling business, Aban added more rigs through acquisitions and mergers. It purchased a 300-foot jack-up rig from Mahindra & Mahindra. This was followed by the acquisition of Hitech Drilling Services (India), which was part of the Tata group. This increased its fleet to four rigs by 2000.
In 2005, the company added two jack-up rigs and a drill ship and, in the same year, went international by launching Aban Singapore Pvt Ltd as its vehicle for international operations. The killer blow: A 33.7 per cent stake in Sinvest ASA, a Norwegian company with eight new premium jack-ups on order, through an open offer of $1.3 billion in 2007.
While these acquisitions made headlines, debt began to take its toll on the company. Also, analysts say that not listing the Singapore subsidiary at the right price and going for short-term contracts at a time when crude oil prices were rising steadily added to its problems.
Salvage operation
Now, the company is trying to set its books in order. The management recently said it wanted to restructure its loans and raise fresh funds (around $400 million, or Rs 2,174.6 crore, according to Thursday’s currency rates) through global depository receipts, foreign currency convertible bonds and other modes, and around Rs 2,500 crore through placement to qualified institutional placements) to reduce debt.
Speaking on the sidelines of its annual general meeting in Chennai, Reji Abraham, managing director of Aban Offshore, said that the company had around Rs 2,000 crore of debt in Indian currency, which attracted an interest of 13-14 per cent. This means an annual interest outgo of Rs 260-280 crore. The company posted a profit of Rs 370.9 crore on a revenue of Rs 3,228.7 crore in 2011-12. A major share of this, around Rs 1,800 crore, is expected to be converted into dollar loans in the next three to four months. Analysts reckon the refinancing of loans with external commercial borrowings would cut interest costs by five-six percentage points.
Rupee loans account for around 15 per cent of the total debt of the company. The larger chunk is in foreign currency. The company has reduced its total debt burden from $2.8 billion last year to $2.6 billion this year and expects to reduce it by around $200 million (around Rs 1,100 crore) every year for the next five years.
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In addition to restructuring, the company is also looking at selling some assets to finance its debt. Abraham said he was considering the option of selling some of the existing rigs to buy new ones and use part of the proceeds for debt repayment. The 18 assets of the company could be worth around $3 billion.
Abraham is also looking to boost revenue by getting into long-term contracts and by leasing Aban’s rigs at higher prices. The company is expecting around 20 per cent increase in the rental of the rigs that are due for renewal. Analysts say the rates at which the company’s rigs are redeployed will be crucial to its future. The operating cash flow of the firm for both the financial years (2012-13 and 2013-14) is strained. This makes contract renewals critical to the company, they add.
An uneven future
But, effecting a complete turnaround won’t be easy. Earlier this month, Aban leased one of its rigs to Petronas Carigali Sdn Bhd for three years for $ 152.75 million (around Rs 800 crore). It was not a huge premium, considering the company had deployed the same rig for $241 million (at that time, equivalent to around Rs 1,133 crore) for four years.
However, one bright spot for the company is that its operating cash flows appear stable. Four of its six rigs whose contracts are due for renewal during the current financial year might get renewed at higher day rates. Besides improving cash flows, it will enhance operating margins. June quarter margins improved by seven percentage points to 59.5 per cent, compared with the preceding quarter, although they’re lower than the year-ago period.