Increasing exploration, production activity in oil & gas sector, along with expected higher rentals, will translate into robust growth.
Offshore services providers, in the eye of a storm till last year with debt problems, are back in the news for good reasons. Recently, private equity firm Templeton bought a stake in Shiv-Vani Oil & Gas Exploration Services. Aban Offshore has also been signing deals to deploy its rigs. Since end-March, stocks of offshore services providers have given 3-13 per cent returns, compared to hardly any returns from Sensex. The renewed investor interest is largely driven by improving fundamentals.
Crude oil price recently touched 19-month highs of $87 a barrel, while experts revised their long-term crude oil price forecast to $85-90 a barrel in the medium term. This is on the back of improving global demand for crude oil, which is seen rising by 9,00,000 barrels per day (bpd) to 85.1 million bpd in calendar year (CY) 2010, compared with the 1.5 per cent decline in CY2009. However, BNP Paribas Securities Vice-President (Oil & Gas) Amit Shah cautions: “Oil still has to contend with short-term bearish fundamentals, which limits the scope for a near-term rally to $100 per barrel.”
For service providers though, according to Dolphin Offshore MD Satpal Singh: “Improving crude oil outlook and proposals to exploit the Gulf of Mexico should suck more assets into development and the surplus rigs that we had seen six-eight months ago would come down.” As utilisation improves, rentals on the equipment would also follow suit.
PUG Institutional Research analyst Avishek Agarwal says: “Rig utilisation levels might increase from 69.6 per cent in 2009 to around 80.4 per cent in 2010 and further to 87.1 per cent in 2011. In conjunction, average day rates should inch up from $1,35,000 in 2009 to $1,50,000-1,65,000 in 2010 and $1,80,000 or more in 2011.”
In this light, companies providing equipment and services to the industry stand to gain. Read on to know the outlook of the domestic offshore services providers that can be considered for investment:
Aban Offshore was mired in debt in 2008-09 after its Singapore subsidiary bought Norwegian drilling giant Sinvest for $1.3 billion. The slump in the offshore drilling space also hit Aban’s cash flows. However, its recent qualified institutional placement (QIP) placement of Rs 700 crore and the rollover of its $3.3-billion (Rs 16,400-crore) debt (repayment in tranches till 2019), the situation has improved. Aban might also consider the listing of its Singapore subsidiary to raise cash to part-pay debt.
Meanwhile, the deployment of its Deep Driller 8 and Deep Driller 1, worth $159 million and $41 million respectively, that follows the deployment of four jack-up rigs in the December quarter, should improve its cash flows. Thanks to its debt concerns, valuations are relatively lower. The stock can be considered on dips.
Dolphin Offshore graduated from a sub-contractor to main contractor status with business operations ranging to diving, marine and fabrication. Dolphin’s key client is ONGC (40-45 per cent in terms of orders) and domestic business contributes around 90-95 per cent of revenues. The company operates primarily on the west coast, with plans to enter other geographies.
Going ahead, Dolphin is foraying into foreign shores for a diversified revenue model. The company plans to become an integrated service player by setting up a Rs 450-crore fabrication unit and a shipyard in Gujarat. Its current order-book size of Rs 620 crore (1.5 times 2008-09 revenues) provides healthy revenue visibility.
Addition of new vessels and higher marine construction revenues saw Great Offshore report a revenue growth of 6.5 per cent year-on-year for March 2010 quarter. Great Offshore’s strong fleet of 47 vessels will hold it in good stead, as demand for exploration and drilling activity is picking up.
Besides, cost management and decline in staff costs improved earnings before interest, taxes, depreciation and amortisation (Ebitda) margins by 300 basis points to 49.5 per cent for the March quarter. However, Ebitda margins could hover at 45-47 per cent in 2010-11. Consider the stock with a medium-term perspective.
Recently, Shiv-Vani raised Rs 93.4 crore through a preferential equity issue to Franklin Templeton to fund its equipment and technology needs. It is looking to raise another Rs 600 crore through the QIP route to fund its future plans. With capital needs getting met and current order book of Rs 3,700 crore (4.2 times its 2008-09 revenues), visibility over Shiv-Vani’s earnings is reasonably good.
Out of 40 rigs, the company deployed 37 rigs till the December 2009 quarter and the balance are expected to be deployed in due course. Since a bulk of the contracts is from ONGC and OIL, which have large capex projects, it is a positive.