Aban Offshore: Too much leverage

The Aban Offshore stock has been a huge underperformer over the past year, losing 91 per cent to the Sensex’s 40 per cent. However, the stock has bounced back in the last few days with the Street seemingly convinced that concerns about the company’s high level of borrowings are exaggerated and that, at a price-earnings ratio of close to one, there can’t be too much downside.

Of the total gross debt of $3.3billion, Aban needs to re-finance around $170 million by December this year. That may not be easy though Aban may manage by paying a higher coupon rate. Thereafter there are repayments due at regular intervals including bonds due for conversion in 2012.

The worry is that Aban may not be able to generate sufficient cash flows in the near term. Already, four of its oil rigs are lying idle and Goldman Sachs reckons more assets that come out of contracts in the coming months would “increase the risk of lower utilisation pushing up the amount of re-financing needed.”

So, although operating margins should s in at close to 60 per cent in the next couple of years and cash flows from operations too should increase smartly in 2009-10 to an estimated Rs 1,530 crore and further in 2010-11, the repayment of loans is a worry.