Aban Offshore Ltd - Rs 1080
Established in 1986, Aban Offshore Ltd (AOL) is the flagship company of the reputed Aban group and is engaged in providing oil field services for offshore exploration and production of hydrocarbons in India and abroad. Notably, it is among the top ten offshore drilling asset owners in the world. It, along with its subsidiaries possesses 21 offshore assets including fifteen jack-up offshore drilling rigs, three drill ships, one floating production platform and a jack-up rig & drill ship each on bareboat charter. It is also among the few global companies to facilitate oil exploration at water depths ranging from 250 ft to 7000 ft and drilling depths ranging between 20,000 ft and 30,000 ft. From having a predominantly Indian presence till 2005, AOL smartly diversified its footprint globally across 10 nations including Malaysia, Vietnam, Thailand, Brunei, China, Bangladesh, Iran, Qatar, Latin America and even across distant locations like Nigeria and Venezuela. It boasts of deploying its assets on charter with leading global and domestic E&P companies such as ONGC, Shell Brunei, Shell Malaysia, Cairn Energy, Petronas Carigali, Exxon Mobil, Chevron, Hardy Exploration, Oriental Oil Dubai, ROC Oil China, and GSPC to name a few. Of late, AOL has made an unrelated diversification into wind energy albeit in a small scale As of now, it’s a loss making venture as it posted a loss of Rs 22 cr for 2007-08.
Ironically, in the last couple of years, crude oil prices have seen an unprecedented rise from US$ 40 to US$ 140 a barrel thereby giving a boost to the global E&P activity. This strengthened the underlying demand for rig services, reflected in increasing enquiries, charter opportunities and the rising demand for deepwater drilling rigs. Even the charter day rates for jack up rigs which are mainly used only in shallow waters upto 400 ft, trebled to more than US$ 150,000 from the previous US$ 50,000. The need & pressure to find new discoveries enabled by the surging oil prices, has compelled oil and gas majors to explore deep waters which were till now less affordable as oil prices were low. Thus, committed oil explorers have already shifted to new deeper fields, expecting larger reserves in the deeper subterranean layers. The Tupi discovery in Brazil and the higher demand for deepwater rigs in the ‘Golden Triangle’ of West Africa, Latin America and the Gulf of Mexico, USA, is a case in point. In Southeast Asia, new gas discoveries in the KG Basin in the Bay of Bengal and in the Sarawak region of Malaysia have necessitated deployment of deepwater floater rigs or the new generation special capability advanced jack-ups of greater that 350 ft water depths. To capitalize this demand, AOL has aggressively ventured into lucrative deepwater drilling by deploying/acquiring drill ships namely Aban Ice, Aban Abraham, Deep Venture and semi-submersible rig Aban Pearl to carry out drilling operations in deep water. In fact, as things stand today, the additional demand for deep water rigs in Brazil alone is as high as 40 while rig availability is nearly nil. To sum up the situation, the global offshore drilling expenditure has increased to US$ 30 bn in 2007 from US$ 20 bn in 2005-06 and is further slated to grow to US$ 55 bn by 2011.
Notably, AOL is all set to capitalize the above opportunity since it has aggressively expanded in last couple of years. During last fiscal two jack up rigs were delivered and one semi submersible rig i.e. Aban Pearl was acquired. On the other hand in the current year, two jack rigs have already been delivered whereas two is expected to be delivered before March 2009. As a result, company’s nine out of 21 rigs are brand new and built within last two years. Besides, it has also upgraded Aban Abraham, a drill ship which is now deployed in West Africa at the rate of US$ 410,000 per day. Infact, all rigs (excluding undelivered) of the company have been deployed at healthy charter rate, barring 2~3 rigs for which active marketing are being carried by the company. Secondly, AOL hires out its asset across long and short term contracts. Long-term contracts facilitate stable revenues and comfortable debt servicing, while short-term contracts enable the company to capitalize on higher than average day rates and gain wider and extensive operational experiences with different operators. Despite working in a hazardous business environment, AOL boast of achieving 43.96 lac person-hours of accident-free operations as on 31st March 2008, which proves its execution capability and seriousness towards health and safety of workers.
Fundamentally, due to new vessel deployment and higher charter rate, AOL will register much better performance in the current year. But the full impact of expansion will be felt only in FY10, as by then all the 21 rigs will be deployed. For global operations AOL has formed a wholly owned subsidiary by the style Aban Singapore Pte Ltd which actually owns the 13 vessels (out of total 21) and is doing higher turnover than the parent company. Accordingly for FY08 on a standalone basis, AOL reported a topline of Rs 658 cr and bottomline of Rs 159 cr. However on a consolidated basis, due to higher interest cost and other factors, PAT stood lower at Rs 123 cr on higher revenue of Rs 2021 cr. But importantly it registered an OPM of 52% even on consolidated basis. After deducting dividend on preference shares, EPS works out to Rs 24 on equity of Rs 7.60 cr having face value as Rs 2/- per share.
In order to fund its expansion, AOL had raised around Rs 430 cr in 2006 thru FCCB route to be convertible into equity @ Rs 2789 per share. Nearly 50% bond has been converted at the same rate and balance bond holders are yet to exercise their option. Post all conversion, diluted equity works out to round about Rs 7.75 cr. Although company boast of having very tiny equity capital, but it has preference shares capital to the tune of Rs 306 cr on which more than Rs 25 cr has to be paid as dividend every year. For FY09, AOL may clock a consolidated turnover of Rs 3250 cr and NP (after preference share dividend) of Rs 500 cr on a. This translates into EPS of Rs 129 cr on diluted equity of Rs 7.75 cr. For FY10 company has the potential to double the NP to Rs 1000 cr.
Ironically, in the last couple of years, crude oil prices have seen an unprecedented rise from US$ 40 to US$ 140 a barrel thereby giving a boost to the global E&P activity. This strengthened the underlying demand for rig services, reflected in increasing enquiries, charter opportunities and the rising demand for deepwater drilling rigs. Even the charter day rates for jack up rigs which are mainly used only in shallow waters upto 400 ft, trebled to more than US$ 150,000 from the previous US$ 50,000. The need & pressure to find new discoveries enabled by the surging oil prices, has compelled oil and gas majors to explore deep waters which were till now less affordable as oil prices were low. Thus, committed oil explorers have already shifted to new deeper fields, expecting larger reserves in the deeper subterranean layers. The Tupi discovery in Brazil and the higher demand for deepwater rigs in the ‘Golden Triangle’ of West Africa, Latin America and the Gulf of Mexico, USA, is a case in point. In Southeast Asia, new gas discoveries in the KG Basin in the Bay of Bengal and in the Sarawak region of Malaysia have necessitated deployment of deepwater floater rigs or the new generation special capability advanced jack-ups of greater that 350 ft water depths. To capitalize this demand, AOL has aggressively ventured into lucrative deepwater drilling by deploying/acquiring drill ships namely Aban Ice, Aban Abraham, Deep Venture and semi-submersible rig Aban Pearl to carry out drilling operations in deep water. In fact, as things stand today, the additional demand for deep water rigs in Brazil alone is as high as 40 while rig availability is nearly nil. To sum up the situation, the global offshore drilling expenditure has increased to US$ 30 bn in 2007 from US$ 20 bn in 2005-06 and is further slated to grow to US$ 55 bn by 2011.
Notably, AOL is all set to capitalize the above opportunity since it has aggressively expanded in last couple of years. During last fiscal two jack up rigs were delivered and one semi submersible rig i.e. Aban Pearl was acquired. On the other hand in the current year, two jack rigs have already been delivered whereas two is expected to be delivered before March 2009. As a result, company’s nine out of 21 rigs are brand new and built within last two years. Besides, it has also upgraded Aban Abraham, a drill ship which is now deployed in West Africa at the rate of US$ 410,000 per day. Infact, all rigs (excluding undelivered) of the company have been deployed at healthy charter rate, barring 2~3 rigs for which active marketing are being carried by the company. Secondly, AOL hires out its asset across long and short term contracts. Long-term contracts facilitate stable revenues and comfortable debt servicing, while short-term contracts enable the company to capitalize on higher than average day rates and gain wider and extensive operational experiences with different operators. Despite working in a hazardous business environment, AOL boast of achieving 43.96 lac person-hours of accident-free operations as on 31st March 2008, which proves its execution capability and seriousness towards health and safety of workers.
Fundamentally, due to new vessel deployment and higher charter rate, AOL will register much better performance in the current year. But the full impact of expansion will be felt only in FY10, as by then all the 21 rigs will be deployed. For global operations AOL has formed a wholly owned subsidiary by the style Aban Singapore Pte Ltd which actually owns the 13 vessels (out of total 21) and is doing higher turnover than the parent company. Accordingly for FY08 on a standalone basis, AOL reported a topline of Rs 658 cr and bottomline of Rs 159 cr. However on a consolidated basis, due to higher interest cost and other factors, PAT stood lower at Rs 123 cr on higher revenue of Rs 2021 cr. But importantly it registered an OPM of 52% even on consolidated basis. After deducting dividend on preference shares, EPS works out to Rs 24 on equity of Rs 7.60 cr having face value as Rs 2/- per share.
In order to fund its expansion, AOL had raised around Rs 430 cr in 2006 thru FCCB route to be convertible into equity @ Rs 2789 per share. Nearly 50% bond has been converted at the same rate and balance bond holders are yet to exercise their option. Post all conversion, diluted equity works out to round about Rs 7.75 cr. Although company boast of having very tiny equity capital, but it has preference shares capital to the tune of Rs 306 cr on which more than Rs 25 cr has to be paid as dividend every year. For FY09, AOL may clock a consolidated turnover of Rs 3250 cr and NP (after preference share dividend) of Rs 500 cr on a. This translates into EPS of Rs 129 cr on diluted equity of Rs 7.75 cr. For FY10 company has the potential to double the NP to Rs 1000 cr.
Despite AOL expected to do remarkably well in coming years, its share price has been slaughtered down to Rs 1000 levels from a high of Rs 5500 in Jan’08. This drastic fall may be due to distress selling by few FII’s as they are holding more than 16% stake in the company. Meanwhile from above statement, it indicates AOL is currently trading at a P/E multiple of merely 8x times which is grossly cheap for a company with such caliber. Moreover company has a huge gross block of Rs 13500 cr including capital work in progress, against which it is available at an Enterprise Value of Rs 17500 cr.
But at the same time investors should keep in mind that oil production from shallow waters is almost stagnant. And with deep-sea drilling gaining importance, the demand for jack-up rigs, the key revenue spinner of the company, could be impacted over the long term. Also, the growing number of new players entering this field with new built jack-up rigs is adversely impacting charter day rates. Secondly, AOL along with its subsidiaries has a huge debt of Rs 12825 cr due to which interest payment forms a major component of cost. Thirdly, if crude oil price continues to fall sharply and settles down to sub US$ 70 levels per barrel, then the E&P activity may slow down globally. However AOL management is competent enough and well prepared to face any adverse challenges. To conclude investors are recommended to buy at current levels as share price can easily double in 12~15 months. Long term investors can expect much superior returns.
But at the same time investors should keep in mind that oil production from shallow waters is almost stagnant. And with deep-sea drilling gaining importance, the demand for jack-up rigs, the key revenue spinner of the company, could be impacted over the long term. Also, the growing number of new players entering this field with new built jack-up rigs is adversely impacting charter day rates. Secondly, AOL along with its subsidiaries has a huge debt of Rs 12825 cr due to which interest payment forms a major component of cost. Thirdly, if crude oil price continues to fall sharply and settles down to sub US$ 70 levels per barrel, then the E&P activity may slow down globally. However AOL management is competent enough and well prepared to face any adverse challenges. To conclude investors are recommended to buy at current levels as share price can easily double in 12~15 months. Long term investors can expect much superior returns.
1 comment:
Aban Offshore currently at 600 is an attractive stock, the drastic fall was due to FII which hold 16% stake in the company due to global financial crisis. There is nothing wrong with the share if u are looking for a long term investment (atleast one year) you can expect very good returns.
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