Drilling dreams

POUND WISE

Acquisitions and increased exploration could help Aban Offshore in a scenario of rising crude prices.

At a time when the supply of new oil rigs for offshore exploration continues to be tight and crude prices continue to remain firm, the expansion spree of Aban Loyd Chiles Offshore (now Aban Offshore) seems just right.

Recently, the company acquired a 34 per cent stake in the Norwegian rig company "� Sinvest "� for a total cost of Rs 2,000 crore. Aban is on the lookout for more expansions in the West Asia and Indonesia.

In the current scenario, the Aban stock is expected to deliver high returns over 3-4 years, even as risks like a possible glut in rig supply and a fall in crude prices cannot be completely ruled out.

But, as of now, crude prices continue to rule firm. The Dubai prices have increased by 27 per cent in the past one year to over $68 per barrel, while the London prices have gained by 24.5 per cent to over $75.

Analysts expect this trend to continue for a couple of years. With this, oil exploration and production would continue to gain momentum, driving the business of the Chennai-based company.

Only if the oil prices fall below $45-50 and there is an oversupply of rigs in a few years from now, will the high debt on Aban's balance sheet drag down the performance. The current debt:equity ratio is 2.13, while interest expense as a percentage of sales stands at 8.04 per cent.

Acquisitions and expansion

The Sinvest acquisition would benefit Aban with Sinvest's two existing rigs and six more, which are in the process of completion. Aban is also eyeing a stake in the Indonesian company - Apexindo, which is viewed as a strategic move, according to Ajit Motwani of Sharekhan.

Apexindo has 10-11 rigs and four swamp barges. During FY06, Aban acquired a 100 per cent stake in West Africa Drilling NV and in 2001 it merged Hitech Drilling with itself. From being a domestic player, Aban plans to enter the oil-rich West Asian region. The company management did not comment on its growth plans though.

Motwani says, "The company now has a diversified asset profile consisting of jack-up rigs, drill ships and a floating production unit. This, along with its geographical diversification provides Aban a decent opportunity to cater to the growing needs of exploration companies."

Aban, the 10th largest oil rig company in the world, engaged in the business of hiring out offshore oil rigs and supply vessels, primarily to ONGC and HOEC, currently has six rigs and three vessels.

It buys rigs from manufacturers like Keppel Corporation, Singapore. The company also has other businesses, notably wind energy, although the focus would be on oil rigs.

Demand-supply mismatch

While, the demand for rigs is increasing with more exploration and production plans by upstream oil companies like ONGC, the supply has not kept pace with the same.

Globally, several capped wells are being opened once again. The rigs destroyed by hurricanes in the Gulf of Mexico are being repaired in Singapore and reused in countries like India and Nigeria, where waters are relatively calm.

According to analysts, the rigs planned by other Indian companies would take 3-4 years to materialise as the rig making yards in East Asia are running full. A drill ship of Aban, expected to commence operations from Q4 FY07, has got delayed to Q2 FY08.

Thus, benefits from most of the upcoming rigs under Aban's control would accrue from FY09 onwards. Moreover, metal prices continue to be high. Setting up a rig now is quite expensive, in the range of Rs 750-1,500 crore and also requires high people skills.

According to analysts, Indian companies that have placed orders for oil rigs include Jindal Drilling, GE Shipping and Mercator Lines. Global competitors include TransOcean and Halliburton. The unmet demand for rigs in India at present is about seven.

With such demand-supply mismatch, day rates (the hiring charges by rig companies) of existing companies like Aban have gone up 3-4 times in the past few years and are expected to remain firm. Thus, Aban's expansion spree is well-timed, according to an analyst with a foreign brokerage.

A study by Sharekhan shows that given the hectic action in the oil drilling space, most exploration and production companies are locking drilling rigs at substantially higher day rates for a longer term of 3-4 years. Day rates are likely to remain firm, even 2-3 years from now.

The company hires rigs for 3-4 years and many of its rigs are due for contract renewal in another one year's time. With the strong demand and limited supply at present, Aban's rigs would get re-rated and command higher day rates. Analysts feel that globally, day rates of $1,50,000-1,90,000 at present could touch up to $2,25,000.

High risk stock

While the company is on a high growth trajectory, analysts feel that it is expanding too fast. If the oil prices fall below $45-55, its business would get affected and then the debt burden will become an issue, as the day rates would become unsustainable.

However, since the company is likely to go in for more equity through private placement, it could soften the debt situation. Analysts add that Aban is generally able to pay off about 75 per cent of the debt in the 2-3 years time for which it hires out its rigs.

Aban and its valuations

Aban posted 70 per cent growth in net sales to Rs 490 crore for FY06 and net profit surged by 62 per cent to Rs 84 crore. However, for Q1 FY07, the company has posted a dip in net profit by 7.4 per cent to Rs 19.08 crore, even as the net sales inched up by 1.6 per cent to Rs 123.8 crore. According to a Sharekhan report, the stock trades at about 30.1x FY07 expected earnings and at about 15.3x FY08 expected earnings.