Aban: The perfect drill

The strong growth in upstream oil exploration is keeping rig rates buoyant.

Aban Offshore has renewed a contract for three rigs with the Oil and Natural Gas Corporation (ONGC) at $156,000 a day and this rate would be applicable for the next three years, which will bring in Rs 2,000 crore to the company.

Clearly, the strong growth in upstream oil exploration in the Middle East and other key regions has led to oil rig rates moving up sharply from $70,000 to $80,000 a day levels in mid-calendar 2005. The Aban Offshore stock rose 2 per cent to nearly Rs 3,100 on Monday.

For ONGC, the hike in operational costs is expected to put pressure on operating margins, but the upstream player is also expected to partially leverage record high crude prices. ONGC shares a portion of under-recoveries of oil marketing companies each quarter, as per the subsidy sharing formula.

Meanwhile, in the June 2007 quarter, Aban's operating profit margin declined 430 basis points y-o-y to 53.3 per cent. The pressure on margins was only owing to the refurbishment cost of Rs 10 crore incurred for its rig Aban II in the last quarter, point out analysts.

Aban is also attempting to leverage the current boom in oil rig rates through its recent agreement with Bulford Dolphin for purchase of a semi-submersible rig for $211 million (approximately Rs 844 crore). The delivery of this rig is expected over the next few months.

Analysts say the rig would earn the company around $225,000-250,000 a day as it can drill deeper than its existing fleet. They also highlight that Aban has several rigs on long-term contracts, that are shortly expected to come up for renewal and the company is expected to leverage higher oil rig rates.

Besides, Aban Singapore, will get listed and bring benefits. At its current price, the stock trades at an expensive 28 times estimated FY08 earnings, but analysts are factoring in a major earnings boost the next year.

Based on FY09 estimates, the stock trades at around 9 times, which is not expensive considering that global exploration investments are going to continue.

Subex Azure: Guidance blues

On Monday, the BSE IT index declined 1.4 per cent over Friday, more than twice the fall in the Sensex. While fears of further depreciation of the dollar continue to exist, some of this fall can be attributed to the downward revision in mid-cap software player Subex Azure's guidance.

In a conference call on Friday evening, Subex told analysts that one of its key customers in North America has postponed its near-term capex commitments.

As a result, the company revised its FY08 revenue guidance from $150 million to $130 million. Its net profit guidance was lowered by 31.6 per cent to $26 million.

Most likely, this is going to be remembered as an one-off event as analysts say that IT-spend is unlikely to coming down for US companies.

They add that larger companies will be better off owing to a larger base of customers across industries, unlike say, Subex, which mainly caters to the telecommunications sector.

Subex is vulnerable financially because of its big-ticket acquisitions. It bought Azure in April 2006 through a share swap, and paid $164.5 million for Syndesis, Canada, in an all-cash deal in January 2007, which it financed through a $180 million FCCB issue.

In Q4 FY07, consolidated revenues declined by 17 per cent, sequentially, as license fee income was lower. In Q1 FY08, consolidated revenues improved 49.3 per cent over the March 2007 quarter, despite the Syndesis revenues coming in. But owing to rising costs on account of the Syndesis acquisition, Subex made a loss at the operating level.

To minimise the loss, Subex plans to cut costs, and transfer 50 jobs from Syndesis to India, though there will be some redundancy costs.

The Subex management said the Syndesis would be earnings accretive despite a 40 per cent dilution in equity. Now, the company has to integrate Syndesis quickly so it starts bringing profits.

As long as this budget cut is a one-off, there is little reason to worry about technology stocks, in general, and Subex in particular, though the appreciating rupee will play spoilsport. The Subex stock fell 12.7 per cent on Monday and trades at about 15 times estimated FY08 earnings, and is likely to be an underperformer.