Aban Offshore: Improving operations, Iran-US deal signal better prospects

The Aban Offshore stock has risen 22 per cent in a week following the news of the US-Iran nuclear deal

The event has raised hopes of a recovery in exploration in West Asia. Also, it is believed once the sanctions on Iran are lifted due to low-risk perception, Aban would be able to get access to low-cost funds from the US and Europe helping it lower costs and better manage its debt.

For Aban, the event has come as a key positive development, given its high exposure to the Iran market. The company has 18 rigs; seven are in Iran. If the outlook and operating environment improves, there is a possibility of the financials improving by way of lower working capital (lower debtors) as well as other expenditure relating to this market.

Earlier, the Street had fears about the recovery of payments from Iran leading to lower valuations. Even after the run-up, at Rs 354, it is trading at just 3.25 times estimated earnings in FY15.

This is when the Street is excessively worried about its highly-leveraged balance sheet. At September-end, Aban had a consolidated debt of Rs 12,991 crore, 3.3 times its equity, hurting its profitability. In the first half of FY14, the company had an earnings before interest, taxes, depreciation and amortisation (Ebitda) of Rs 1,027 crore, while it incurred an interest cost of Rs 558 crore, or 54 per cent of the Ebitda.

The operating performance has been improving in two quarters and, to some extent, helping deal with liquidity and interest costs. "All assets held by Aban, except FPU Tahara, continue to remain contracted. With a considerable improvement in the operational performance and increasing asset utilisation, we believe the uncertainty over debt refinancing would reduce," said Mayur Matani, who tracks the company at ICICI Securities, in a note.

Recently, the drillship Aban Ice was contracted at $170,000 a day to Oil and Natural Gas Corporation (ONGC) for three years. Higher utilisations and improvement in rig rates have also started to reflect in the performance. In the first half of FY14, it reported a 4.8 per cent growth in revenues at Rs 1,890 crore followed by 50.3 per cent growth in net profit to Rs 152.4 crore.

Improvement in the operational performance and efforts to cut debt could lead to further re-rating. The company recently converted rupee loans of Rs 2,200 crore into foreign-currency debt at Libor plus six per cent, which costs 6.3-6.5 per cent compared to the rupee rate of 14 per cent.

Analysts say this could save Rs 154 crore annually in interest costs, equal to the net profit in the first half of the financial year. Analysts are expecting the interest cost to come down from Rs 1,172 crore in FY13 to Rs 1,000 crore in FY14. Analysts are expecting its net profit to rise from Rs 240 crore in FY13 to Rs 530-550 crore in FY15.

The cash flows will improve. This should allow it to meet some of its debt payments. The company also plans to raise funds of Rs 4,500 crore through instruments, including qualified institutional placement (QIP) of up to Rs 2,500 crore. Though the timing of such issuances and pricing are not known, the Street believes if the markets remain conducive, such initiatives could help in further reduction in debt, without much worry on the dilution front.

Given its market capitalisation of Rs 1,605 crore, at current levels it could mean sizeable dilution. Hence, the timing and pricing of fresh equity issuance is crucial.