Skip to main content

Aban Offshore: Buy


Spurt in global exploration activities on the back of a steadily rising oil price scenario suggest good prospects for Aban.




Tight supply of rigs worldwide may help Aban scale up revenues

Given the large fleet size and presence in global markets through its foreign subsidiaries, Aban could emerge as one of the leading beneficiaries of this demand uptrend.

Aban's well-timed fleet expansion moves are backed by good operating efficiency and re-pricing of old contracts at higher rates. At the current market price of Rs 3,887, the stock trades at 11 times its likely FY-09 per share earnings.

This appears reasonable considering Aban's historical earnings growth and the ongoing cyclical uptrend in the offshore drilling industry. Investors can utilise the recent correction in the stock market to accumulate the stock.

Expansion in fleet size

Aban's strategy of expanding its fleet size has helped given the rising demand for rigs on the back of a relative stagnation in availability. After the acquisition of Norway-based Sinvest ASA, Aban's fleet size has increased to over twenty offshore assets, which includes 15 jack-up offshore drilling rigs, two drill ships, one floating production platform and a jack-up and drill ship each on bareboat charter. This fleet size is huge vis-À-vis other domestic players and compares well with some of the bigger global players as well.

Equipped with such a large rig bank, we expect Aban to enjoy a fast track growth in revenues, given the tight supply of rigs worldwide.

This apart, the proposed addition of a few more rigs to the company's fleet in a couple of years may also lower the average age of its fleet considerably. This is likely to improve the marketability of Aban's rigs, even as day rates might begin to taper-off by 2010. Further, Aban also stands to benefit by way of expansion in margins given the relatively lower refurbishment cost of new rigs.

Strengthening day rates

With a dearth in availability of oil rigs, day rates over the past couple of years have soared significantly. In this context, the re-pricing of most of the existing contracts of Aban Offshore (the standalone entity) at attractive prices lends confidence on the demand scenario. It also provides earnings visibility for Aban over the medium-term since most of these contracts have been committed for a medium-term horizon.

The most recent renewal of its three-year contract for Frontier Ice with ONGC at a day rate of about Rs 62 lakh (a significant premium to market expectations) reiterates the strong demand prospects.

Notably, this contract also (previously Aban II and Aban VI) has been billed in non-USD currency. This might offer some respite to Aban's earnings from any likely depreciation in the US currency.

Financials

On a standalone basis, the company clocked an earnings growth of over 130 per cent for the quarter ended December 2007. This was achieved on the back of a 34 per cent increase in revenues, thanks to the re-pricing of two of its assets during the quarter.

Operating profit margin was marginally lower at about 53.08 per cent. The company, however, has a high gearing, given the aggressive capex incurred for the construction of new assets and the funding of its Sinvest acquisition. While this could weigh on Aban's earnings over the medium-term, it may begin to ease-off once the new assets become operational. Till such time, Aban's cash flows may help it service its debt efficiently.

Near-term triggers

The company is expected to announce the contract for its newly built jack-up Aban VIII in the next couple of months. This, if struck at higher than expected rates, may offer a short-term upside trigger.

Besides, the proposed listing of its Singapore subsidiary, aimed at refinancing its existing debt structure, may also provide an earnings upside.

While the company expects to retire a chunk of its debt through the potential listing, a lot might hinge on the revival of the IPO market and the perceived valuation of the subsidiary. That apart, a fall in oil prices and excess supply of oil rigs, resulting in a lower day rates, may pose a downside risk to our recommendation.

Popular posts from this blog

Bio-fuel has top investors powered up

23RD ,JUNE India's fortune-hunters believe their new-found love for biofuel will pay off. India's well-known investors who are known for their Midas touch have spotted an opportunity in bio-fuel, betting big on ethanol, bio-mass and even bio-fuel equipment makers in India and other parts of the globe. Billionaires Rakesh Jhunjhunwala, C Sivasankaran, Vinod Khosla, founder of Sun Microsystems, and Nemish Shah, the media-shy joint partner of Enam Financial Services, are investing in bio-fuel makers quietly, expecting that bio-fuel will have a big play in the coming years as the world looks for a viable alternative to the fast depleting oil reserves. Jhunjhunwala, who is known for his ability to spot a multi-bagger at a very early stage, recently invested in Hyderabad-based bio-fuel firm Nandan Biometrics.He is also a 10 per cent stakeholder in Praj Industries, which is a bio-fuel technology provider…

up to 8,500% return in 5 years! Investors made a killing in these 30 smallcap stocks

U By Rahul Oberoi, ETMarkets.com | Updated: Dec 01, 2017, 04.06 PM IST Post a Comment
Efficiency pays in the long run. Among the top smallcap plays on Dalal Street, 30 companies with stable return on equity (RoE) and return on capital employed (RoCE) have surged up to 8,500 per cent over the past five years.

All these companies had a debt-to-equity ratio of less than 1 and have been maintaining RoE and RoCE of over 20 per cent since 2012-13.

Avanti Feeds emerged the chart topper, with an 8,527 per cent gain to Rs 2,596.60 as of November 28 from Rs 30.10 ..


ovember 28 from Rs 30.10 on November 27, 2012. The company’s return on equity for FY17, FY16, FY15, FY14 and FY13 stood at 42.65 per cent, 46.21 per cent, 52.41 per cent, 45.79 per cent and 27.60 per cent, respectively. Avanti also managed to achieve a return on capital employed of over 50 per cent in last four years. Its RoCE stood at 28.59 per cent inRoE measures net income earned for every rupee of shareholder funds, while…

5 dark-horse picks

Kwadrat/shutterstock.com Kwadrat/shutterstock.com
If you are a conservative investor, using the mutual fund route is the best way to invest in stocks. But if you are game for some excitement, you might want to dabble directly in stocks, especially small-cap stocks. Stocks that are smaller in size, in terms of market capitalisation, carry higher risk. The reasons are — one, lower traded volume increases price volatility, two, information is usually scarce on these companies, three, business risk is higher since many of these companies are dependent on a single product and four, governance risk is also higher in these stocks. That said, small-cap stocks have the capacity to deliver far greater returns when compared to large-cap stocks. Sample this: there were 16 stocks with market cap more than ₹50,000 crore in January 2009. These stocks delivered an average return of 138 per cent in the last eight years but 4 out of every 10 stocks in this group delivered negative returns. On the ot…