ABAN OFFSHORE - High Risk High Returns Investment

Aban Offshore is highly leveraged and this status makes it a better fit for investors with a high risk appetite
Beta: 0.49
Institutional Holding: 21.2%
Dividend Yield: 0.2%
P/E: 51.3
M-Cap: Rs 7,938 cr
CMP: Rs 2,100
ABAN OFFSHORE is India’s largest company in the offshore drilling industry. Its market capitalisation (m-cap) trebled year-on-year to Rs 20,000 crore in January ’08 on expectations of a sharp jump in its revenues and profits. Ironically, just when these expectations are about to turn into reality, its m-cap has lost more than 60% of its value. Considering the attractive rates at which Aban’s fleet of offshore rigs is deployed and the strength in the global market for such equipment, its valuations look attractive in the long term.

BUSINESS: Aban owns a fleet of 16 jack-up rigs, four drill ships and one floating production unit used in the offshore petroleum production industry. The company, which acquired Norway-based Sinvest in March ’07, is currently ranked 11th in the global offshore drilling industry. Aban added two new rigs in FY08 and will be adding four more in FY09. With these, the company will have nine brand new rigs in its total fleet of 21.

It set up a subsidiary in Singapore in ’05 for tax benefits, which now owns most of the company’s vessels. Aban has also ventured into wind power generation, which contributed revenues worth Rs 12 crore in FY08. The company offers a number of its vessels on longterm charters, while offering others on short charters to benefit from trends in the spot market. At present, the company has seven vessels chartered for over three years or more, while nine vessels will complete their contracts in the next 12 months.

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GROWTH DRIVERS: With the spurt in global exploration and production (E&P) activities over the past few years, the demand for offshore drilling assets has gone up substantially. This has not only boosted the daily charter rates for such assets, but their utilisation rates have also increased. Aban Offshore is in a sweet spot to benefit from this boom. The company, which had consolidated revenues of just Rs 3,230 crore in the preceding 36 months, already has firm contracts worth Rs 7,400 crore for the next 36 months. At present, three of its vessels are yet to be deployed, while several others will complete their current contracts and get redeployed over these 36 months, further boosting the company’s revenues.

Global offshore drilling expenditure, which was $30 billion in ’07, is expected to rise to $55 billion by ’11, thanks to the sustained increase in oil prices. This is increasing pressure on oil companies globally to accrue new reserves, while the viability of marginal fields has increased.

The company plans to raise funds to retire its debt, while financing its plans to boost deepsea capabilities. It also plans to add more floating production units to support new oilfields, which can be chartered for long durations.

FINANCIALS: At the time of the acquisition of Sinvest in FY07, Aban had to raise substantial finances, which the company managed to do without diluting equity capital. Instead, it issued preference shares and raised heavy debt. This led to a spurt in its debt-toequity ratio to 20 last year on a consolidated basis, which came down to 16 for the year ended March ’08. The interest coverage ratio has also improved marginally to 1.6 in FY08 from 1.1 in FY07. Aban’s strong cash flows and future visibility thereon are helping the company to sustain such high leveraging. During FY08, the company’s consolidated operating cash flows jumped 2.6 times to Rs 834 crore from Rs 319 crore last year. For the year ended March ’08, Aban posted a consolidated net profit of Rs 123 crore on revenues of Rs 2,021 crore.

Its profit was affected by a mark-to-market loss of Rs 194.4 crore on its outstanding loans. However, it is a net foreign exchange earner, which provides a natural hedge against repayments of foreign loans.

VALUATIONS: At the current price of Rs 2,100, the company is trading at 51.3 times its consolidated profit for the year ended March ’08. However, it is expected to more than double its revenue to Rs 4,240 crore in FY09 on a consolidated basis, maintaining its operating margin above 60%. The consolidated net profit is expected to touch Rs 936 crore, translating into earnings per share (EPS) of Rs 248. The current market price is just 8.5 times the expected FY09 earnings. Given its growth prospects at one end and highly leveraged business strategy at the other end, the scrip can be considered by investors who have high risk appetite.