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Saturday, September 6, 2008

Great Offshore - Stocks Analysis

Great Offshore Ltd (GOL) was formed in April 2005 after the demerger of the offshore oilfield services business of the Great Eastern Shipping Company. And in the short three years hence, GOL has become India's largest integrated oilfield service provider catering to the upstream oil and gas sector.

However, the company's primary gamut of services is made up of offshore services to the exploration and processing companies. These services include providing offshore logistics support services, port & terminal services, offshore drilling services and marine construction projects & services. GOL has a diversified offshore fleet of 41 vessels, which include offshore support vessels, harbour tugs and construction barges.

Investment Rationale

Timely Fleet Expansion

In FY06, GOL added eight vessels to its fleet, expanding the same from 33 to 41. The company has plans to further add a jack-up rig and an MSV to its fleet by Q1FY10. The vessels addition would increase the number of revenue days, and with day rates likely to remain firm, this would lead to a rapid growth in revenues. The incremental revenues from the new vessels as a percentage of the total revenue would increase from 7.1 per cent in FY07 to 29.5 per cent in FY10E, accelerating the company's revenue growth considerably over FY07-FY10E.
Diversified Presence in Offshore
Segment
GOL, being the only integrated Indian player in the offshore segment, has carved a niche for itself by offering a large spectrum of services. It has a presence in offshore support services as well as port & terminal services. Its diversified fleet portfolio has enabled the company to hold a distinct advantage over competitors by building strong customer relationships and catering to a wide range of client requirements. GOL has built a strong business model by spreading its range of activities over a number of offshore service requirements of the upstream oil and gas sector. The company's fleet has a balanced mix of AHTSV (Anchor Handling Tugs cum Supply Vessels), PSVs (Platform Supply Vessels), MSVs (Multi Support Vessels) rigs, construction barges and anchor handling tugs for port & terminal support services.


Enhanced Contribution from Rigs
The increasing offshore E&P (exploration & processing) activities have resulted in an increased demand for drilling assets like rigs. The utilization levels of rigs are touching 100 per cent and their day rates have increased significantly as well. GOL's two existing rigs - at Badrinath and Kedarnath - have been deployed by ONGC. GOL has also received an order from ONGC for its under-construction rig at Samed Shikhar and consequently, the contribution to revenues from the rig business is expected to increase from 20.9 per cent in FY07 to 35.1 per cent in FY10E. The enhanced contribution from the rig segment would enable GOL to have better revenue and earning visibility on account of the long-term contracts and firm day rates.

New Engineering Contract
GOL has been awarded a contract by ONGC at a contract value of Rs 234 crore. The contract is for GOL to provide engineering services on production/process platforms at ONGC's three fields located off Mumbai High. The contract is scheduled to be completed by the middle of calendar year 2010. The ticket size of this contract is very significant and will enable the company to attain a better business positioning.

Buyback of Shares
Recently, GOL initiated a buyback of equity shares from its existing owners at a price not exceeding Rs 750 from the open market. The company bought 881,000 shares aggregating Rs 50.23 crore at an average price of Rs 570. The amount of shares bought back constitutes 91 per cent of the total offer size approved by the board earlier. The equity capital of the company has thus reduced from Rs 38.12 crore to Rs 37.23 crore. The buyback of shares is expected to result in an increase in the company's share prices.

Risks & Concerns
Downturn in Crude Oil Prices

The demand for OSV (offshore support vessels) is linked to the level of E&P activities. Increased exploration activities lead to higher demand for OSVs and vice versa. The level of activity is in turn sensitive to the movement in crude oil prices. Any significant downturn in the crude oil price can negatively impact the level of exploration activity, both domestically and globally, and thereby result in slowdown in the demand for OSVs.

Delay in Vessel Delivery
GOL's revenues are contingent on the timely delivery of the vessels. Any delay in delivery of vessels would impact the revenues.

Valuations
GOL is currently trading at 6.1x FY10E earnings. The stock has declined substantially due to the market correction and cancellation of its plans of acquiring a majority stake in a company having on order two harsh environment drilling assets. Furthermore, the addition of two semi-submersible rigs in the next three years would enable GOL to have a commendable presence in the lucrative deep water drilling segment. The company also possesses high ability of capitalizing on the buoyant industry dynamics and with that in mind, the positive stance in the stock can be maintained. The steep correction in its price makes it a compelling buy at the current levels. However, its target price has been lowered to Rs 728, in line with the reduction in the FY10E earnings.

Source: Icici Direct

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