Is the fall in Aban Offshore's stock justified?

Street worried on impact of lower oil prices; analysts say these can be partly offset by de-leveraging gains

Aban Offshore's scrip has underperformed the Sensex over the past few months. The stock is down 32 per cent since November. The weakness is largely due to the continuous decline in crude oil prices, which triggered fears Aban's day rates may come under pressure. Prices could hit capex plans of oil exploration-and-production (E&P) firms, affecting demand for Aban that provides equipment and services for  E&P.

Analysts say most of Aban's contracts are long-term (three years) and, hence, more resilient to price movement. Aban operates largely with national oil companies (NOCs), which may not trim capex plans as these aim to attain energy security. The firm’s efforts to de-leverage its balance sheet will boost its earnings in two-three years.

The downside risk could rise if prices stay low for long. A slowdown in capex by global players could increase competition from foreign companies.

While Aban could face the risk of lower day rates when existing contracts are renewed, its continued long-term association with NOCs provides comfort. In October, it renewed a contract with Oil and Natural Gas Corporation for three years. While the value was Rs 1,114 crore, it was signed at 33.5 per cent higher day rates of $83,400.

Macquarie Securities cut its target price 18 per cent to Rs 816 last Tuesday, but it maintained its buy rating. It says Aban's de-leveraging story is intact and its rig-rates will be relatively resilient to prices.

Aban plans to re-finance its high-cost rupee debt with dollar- debt. This will reduce its interest costs 17-18 per cent in FY16 compared to FY14’s. As a result, analysts expect the net profit to grow 40 per cent in FY15 and 23.2 per cent in FY16. For FY17, the growth is pegged at six-seven per cent.

Aban recently raised Rs 850 crore via qualified institutional placement and plans to list its Singapore subsidiary to re-pay its debt of Rs 14,000 crore. Analysts expect the net debt-to-equity ratio to come to two times in FY16 from 3.9 times in FY14. Most analysts remain positive.