Aban Offshore: Oil's well

With spends on offshore drilling expected to sustain, the demand for oil rigs should be reasonably strong .

The Aban Offshore stock has risen by more than 11 per cent over the last three trading sessions to touch a price of Rs 3,720. The Street believes high crude prices and the good profitability of oil firms should boost expenditure on offshore oil and gas operations and, therefore, sustain the demand for offshore drilling rigs.

While rates for deep water rigs should remain high for three to five years, jackup rates, say industry watchers, could come off somewhat due to an increase in supply globally since resources for shallow water drilling are estimated to be lower than that for deep water drilling.

Aban, which has mainly jackups and supplies to firms like ONGC, may be able to make the most of the near-term opportunity. However, unless it invests more in deep water rigs, it might lose out on the longer deep water cycle.

The company has a mix of long-term and spot contracts and is looking to balance better realisations with a stable revenue stream. Analysts believe, the company is trying to ensure stable day rates from long term contracts for its older Indian assets while attempting to earn higher rates from spot contracts for assets in its Singapore subsidiary. Aban is in the process of renewing contracts for a couple of its rigs - for which it should be able to negotiate good rates and protect itself against rising costs.

Meanwhile, Aban turned in some fairly good numbers for the March 2008 quarter even though the Street was probably expecting more. With the contract for one of its rigs "" Aban VI "" being renewed in mid-January at $88,5000 a day, nearly double the earlier rate, the stand-alone top line grew 66 per cent to Rs 196 crore.

However, work on another rig, for which the contract had expired in February, was slightly delayed. While costs for repairs as well as also rentals for machinery were unexpectedly higher during the quarter, the company kept a check on staff costs. The operating profit margin rose by a 1,000 basis points to 50.3 per cent, pushing up the operating profit by 107 per cent to Rs 98.85 crore.

Aban is expected to close FY09 with consolidated revenues of around Rs 4,500 crore and a profit after tax of Rs 1,800 crore. At current levels of Rs 3,720, the stock trades around eight times estimated FY09 consolidated earnings.