Aban Offshore: Oil's not well

If oil firms cut back on capex, Aban’s contracts for jack-ups may fetch lower rates.

At $47 per barrel, crude oil prices may have started looking up from their lows of the year, but they are way below the highs of $147 per barrel. And that could affect the fortunes of the Rs 2,021 crore Aban Offshore. Aban, which owns oil rigs and jack ups that are used for drilling oil in shallow waters, had acquired Sinvest ASA in 2006 and Bulford Dolphin to foray into deep water drilling. All was well till recently when the demand for crude oil started weakening: now it appears that oil companies will be forced to hold back spends that they had allocated for exploration and production. And that means less demand for jack-ups, which form a major component of Aban’s portfolio.

Analysts say rates for jack ups could come off by as much as 18-20 per cent in 2009 after capex plans are revisited by oil companies in November and December. If they cut back on expenditure, Aban’s short term contracts (six-nine months) could be renewed at lower rates.That apart, fresh assets are expected to be added in the next couple of years which would further push down rates earned by Aban’s jackups. So far though, rates have held up pretty well. This together with a depreciating rupee, has helped Aban grow revenues by 99 per cent in the first half of 2008-09 to Rs 1,573 crore. However, things could be somewhat different now if contracts are renegotiated at lower rates and so the rise in revenues for 2008-09 may not quite match the growth of 181 per cent achieved in 2007-08.

The firm’s net profit in 2007-08 was Rs 123 crore while in the six months to September, it earned Rs 392 crore helped partly by an increase in other income. While the business should continue to do reasonably well, Aban has a foreign currency convertible bond (FCCB) of around 410 yen, which is due to mature in April 2011 at a conversion price of Rs 3,397. That, no doubt, is way above the current price of Rs 798, but there is a reasonable amount of time left for the conversion and, moreover, the company should not find it difficult to roll over the borrowings, if necessary.