Aban Offshore: Awaiting triggers

Inexpensive valuations but weak crude oil prices and high debt remain negatives

Falling crude oil prices significantly hurt the prospects of drilling service companies such as Aban Offshore. First, exploration activities become unviable, given the high costs, forcing smaller firms to exit the business. Second, while hiring their rigs for drilling activities, bigger upstream companies start re-negotiating rates with companies such as Aban. (Upstream companies identify oil and natural gas deposits and engage in the extraction of these from underground.) This has a bearing on capacity utilisation, as well as earnings of drilling companies.

Aban Offshore had debt of Rs 14,116 crore as of FY15, leading to high interest costs. The Aban stock has been under pressure of late, recording a 52-week low of Rs 216 on August 25.

 

There have, however, been some positives, too. These include lifting of sanctions imposed on Iran, which accounts for about 35 per cent of Aban’s revenues. While the lifting of sanctions will put its five rigs in the region to good use, analysts believe rates will continue to be under pressure there, given the soft crude oil prices. In addition to four idle rigs, seven others will record end of contracts by March 2016 and renewals are likely to be at lower rates, given expectations of flattish capital expenditure by upstream companies.

Aban Offshore is focusing on cleaning its balance sheet and could seek shareholder approval to raise $400 million through American depositary receipts/global depositary receipts and Rs 2,500 crore through qualified institutional placements. (QIP is a designation of a securities issue given by the Securities and Exchange Board of India that allows an Indian-listed company to raise capital from its domestic markets without the need to file any pre-issue filings to market regulators.)

This will enable it to cut its debt-to-equity ratio from 2.5 in FY15 but there will be some equity dilution.

Recently, the Cabinet approved the auction of 69 small and marginal oilfields of Oil and Natural Gas Corporation (ONGC) and Oil India. This is good for Aban. But, the auction isn’t happening soon.

Crude oil prices remain vital to Aban. An improving balance sheet and auction of oilfields might provide part relief. While valuations appear inexpensive, lack of catalysts will keep the stock in check in the near term. Analysts at BNP Paribas expect the net profit to fall 22 per cent year-on-year to Rs 401 crore in FY16 and recover to Rs 446 crore in FY17 (up 11 per cent). Of six analysts polled by Bloomberg since August, three have buy rating on the stock, two sell and one hold.