Day rates for jack-ups (movable structures used for drilling oil in shallow waters) have come off slightly in July because of an increase in supply. They could come off further in the next couple of years as the global fleet increases by 14 per cent. That cannot be good news for the Rs 2,021 crore oil drilling firm Aban Offshore, whose fleet is skewed towards jack-ups, and which contributes significantly to its revenues.
What’s more, there’s likely to be some sluggishness in shallow water rigging because of a shortage of resources. However, till such time crude prices remain firm, the company should be able to take advantage of the demand for jack-ups. Currently, rates are firm and, therefore, cantilever type jack-ups should continue to be in demand.
Aban had acquired Sinvest ASA in 2006 and Bulford Dolphin in 2007 to foray into deep water drilling, the business cycle for which is expected to last longer. However, jack-ups continue to be a major component of its portfolio.
Rising demand for oil is prompting oil companies to spend more on explorations. The June 2008 quarter saw Aban (stand-alone) take full advantage of the demand for jack-ups as it pushed up day rates for four of them. As a result, its top line grew by a healthy 94 per cent y-o-y to Rs 247 crore.
However, even though costs for machinery and repairs increased by 340 per cent y-o-y to Rs 26.8 crore, they did not pressure the operating profit margins, which expanded by a smart 390 basis points y-o-y to 56.6 per cent. Tax concessions for Aban’s Singapore subsidiary, which should contribute significantly to revenues, should help the bottom line. Besides, Aban is looking to rent the Singapore assets at spot market rate, which are higher than those for long term contracts.
Today, Asia commands 25 per cent of global offshore drilling spends, and Aban is hoping to tap this opportunity by deploying a major part of its fleet in the region. Aban is expected to close FY09 with consolidated revenues of around Rs 4,100 crore da profit after tax of Rs 1,100 crore.
The stock has underperformed, correcting by 56 per cent since the start of the year, compared with a 29 per cent fall in the Sensex. At the current price of Rs 2,171, it trades at seven times estimated FY09 earnings and is reasonably priced.