Aban Offshore, whose share price was languishing for quite some time, is up almost 50 per cent over the past month. The news of Goldman Sachs picking shares of Aban worth Rs 22 crore from the open market has also rubbed off positively on the stock. The increasing market interest can partly be attributed to emerging stability in the business, since the downturn after the 2008 global crisis. Average daily rates of jack-up rigs of over 300 ft of rated water depth have been inching up gradually from $135,000 in the June 2011 quarter to $147,000 in January 2012. Aban has 15 jack-up rigs, of which nine have rated depth of 350-375 feet, while the remaining six have rated depth of 250-300 ft.
In the prevailing scenario, the company can generate about Rs 2,000 crore of cash flow over the next two years, which is not significantly different compared to its current market capitalisation of Rs 2,325 crore. If this cash is used for retiring debt, even at an eight per cent rate of interest this could mean an addition of Rs 120 crore to net profit annually. The peaking of the interest rate cycle also augurs well for Aban.
Assuming its enterprise value (market cap plus debt) remains unchanged in the medium term, the reduction in debt (and addition to equity) implies upside from current levels for the stock, which is trading at six times its earnings and 0.8 times its book value, based on 2012-13 estimates. While valuations appear reasonable, they come with attached risks pertaining to the company’s highly leveraged balance sheet, which needs to be monitored. Thus, investors with some risk appetite may consider the stock from a year’s perspective.
| DECLINING DEBT LEVELS | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Sales | 3,347 | 3,269 | 3,339 |
| Ebitda (%) | 65.3 | 59.4 | 61.4 |
| Net profit | 190.8 | 335.5 | 359.4 |
| EPS (Rs) | 25.9 | 77.1 | 82.6 |
| PE (x) | 20.2 | 6.8 | 6.3 |
| Debt to equity (x) | 5.8 | 5.4 | 4.5 |
| E-estimates Source: Elara Securities | |||
Debt overhang
As on September 30, 2011, Aban’s total debt was at a high of Rs 13,425 crore. While the debt-equity ratio was 5.2, it is improving slowly (it was 6.5 in 2009-10). The company recently redeemed $160 million of bonds through internal accruals and fresh issues. While this should see a reduction in debt (estimated to fall to Rs 11,500 crore in 2012-13), the fresh bond issue happened at a higher coupon rate of 12 per cent. Thus, it could offset part of the gains resulting from debt reduction. Analysts are also concerned about the repayment of $157 million due in March 2012, which they believe could happen at similar rates. Thus, they have increased their estimates for interest cost in 2012-13.
“We see increasing interest costs for Aban over the next four to six quarters, due to the higher blended interest costs. Further, we do not see a strong growth in Ebitda in FY13/14, leading to a stressful interest coverage ratio, which may serve as an overhang on the stock in the coming quarters,” says Alok Deshpande of Elara Securities. He estimates operating profit to rise five per cent to Rs 2,075 crore, interest costs by three per cent to Rs 989 crore and net profit by 7.5 per cent to Rs 360 crore in 2012-13.
Operating gains
On an average, Aban is expected to report an operating profit of Rs 2,050 crore in FY13 or about two times its interest cost. In this environment, the pricing and demand scenario is crucial. Any deterioration on this front could lead to a fall in profit next year, estimated at Rs 400 crore (average).
The good part is that Aban has been able to increase utilisation of its assets. Aban possesses 18 offshore assets (including 15 jack-up rigs) and only one asset, Aban V, is reportedly idle. It sent for use Aban III and IV in the June 2011 quarter and recently signed Aban II with ONGC for three years. This will lead to better asset utilisation; Rigzone.com shows Aban’s utilisation at 94 per cent, whereas Centrum analysts estimate it at 94.2 per cent in FY13, against 86.3 per cent in FY12.
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However, with some of the rigs coming for renewal, analysts are watchful about the next year. “Though Aban boasts of a revenue backlog of $1.9 billion (about Rs 9,500 crore) over FY12-15, revenue visibility stands at 65 per cent for FY13, as six rigs are due for contract renewal in the second half of FY13,” says Ajit Motwani, analyst at Emkay Global, in his recent note.
The concerns could ease if rig rates hold firm. Globally, jack-up rig utilisations are healthy at about 80 per cent, a good sign of stable demand and prices. During 2009, when crude oil prices fell to $40 a barrel, rates of jack-up rigs of 300-plus ft of water depth dropped to $50,000 a day and utilisation to 72 per cent. However, currently, rates for these rigs of 300-plus ft water depth are around $147,000 per day (the highest was $2,20,000 in January 2007), and analysts reckon these will remain stable, as there are no major supply concerns.
Overall, a combination of higher utilisation and stable rig rates are positive from the business point of view, and should lead to improvement in margins. These have slipped in the last three quarters, including December. In Q3, the decline in margins had led to a 30 per cent fall in net profit, despite an 11 per cent rise in consolidated revenues. Going ahead, in the absence of immediate capex, the improving business environment and cash flow could help Aban to reduce its leverage.