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Thursday, May 8, 2008

gem worth investing - ABAN OFFSHORE

ABAN OFFSHORE

The record high crude oil prices, worldwide shortage of rigs and investments to spruce up domestic oil production will benefit Aban Offshore, which provides rigs and allied equipment to the oil and gas industry.

The company's well-timed fleet expansion in a tight supply, high demand scenario and renewal of longer-duration contracts at higher day rates would boost earnings over the next few years.
Aban is set to add five assets (four new jack-ups and a recently acquired semi-submersible rig) between CY08 and CY09 to its existing fleet of 16 offshore assets (post the acquisition of Sinvest).

Further, the company has renewed its longer duration contracts at much higher day rates, which means higher growth in profits.

For example, its two contracts with ONGC for three years each ? one commencing from March 2008 and another already commenced from December 2007 ? have been renewed at $150,000 per day each as against $45,000 and $28,000-$56,000 a day respectively, reflecting a more than three-fold rise in value of contracts.

Another contract, for six years, with Oriental Oil, which commenced from October 2007, was renewed at $87,000 (as compared with $40,000). Analysts expect this kind of supply tightness to continue till CY10.

The company's acquisition of Sinvest, gave it access to premium jack-up rigs and quicker supply of rigs, which otherwise would have taken about three years.

Thus, the expected strong operational cash-flows will help Aban bring down the huge debt on its books (high debt to equity ratio of 1.7 in FY07) and boost earnings.

Lastly, while the growth in earnings in FY09 is steep as compared with the EPS of Rs 40 for trailing 12 months, it comes on the back of a loss in FY07 (due to five-fold rise in interest costs).

Nonetheless, after adjusting for the low base effect, Aban's expected growth in earnings is more than healthy and its future prospects continue to be good, all of which make it a good bet.

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