Fresh lease of life for Aban Offshore

Lifting of sanctions on Iran will lead to increased exploration and production activities

The lifting of sanctions on Iran will boost the oil exploration and production (E&P) activities in the region, bringing respite to Aban Offshore, which had been staring at risks to its revenues and profitability.

Aban’s woes had compounded with nine of its 18 rigs going for renewal of contracts in 2015 and three being idle. The company having high debt thereby had lost two-third of its market cap, with its stock falling from the highs of Rs 821 in August 2014 to Rs 276 on July 13.

The stock, too, has gained 19 per cent in the past three sessions, to close at Rs 327.65 a share on Wednesday. The company has substantial deployment of rigs in West Asia. Of its deployed rigs (Aban VI, Aban VIII, Deep Drill 2,4,6), Aban VI is likely to see renewal in August, while Deep Drill 2 and 4 are expected to be renewed in September and October, respectively. What’s more, while earlier the Street had expected lower renewal rates and asset utilisation for rigs, with improved prospects of E&P activities in the region, the company might get a comparatively  better bargain, leading to better revenues and profitability.

Also, the idle rigs (Aban V, VII and Tahara) which are believed not to have been removed from Iran can see deployment,  providing further boost to revenues and profitability. After the removal of sanctions, the insurance rates on rigs deployed in this region will also come down and boost Aban’s margins. Hence, for Aban Offshore, estimated to be earning 35 per cent of its revenues from Iran, the prospects are improving.

While the quantum of increase in day rates for rigs will have a strong influence on profitability, the key concern with respect to the high debt  remains. The loan funds on the company’s book at the end of March stood at Rs 13,319 crore.

The firm had raised Rs 850 crore some time ago, leading to some equity dilution; the same should lead to lower interest costs in the coming days as well. Anticipating a resolution in Iran, Sumit Pokharna of Kotak Securities had given a target of Rs 413 at the end of March.

This indicates the stock can see an upside of up to 25 per cent from current levels as progress in Iran is made. The company also plans to raise $500 million by listing its Singapore subsidiary, which can cut debt further. And as the same happens, it can be the next trigger for the Aban stock.