Pariah Turned Darling?

Stock markets are a world in their own. And stocks, which inhabit this world, often have fascinating stories to tell. One such story is that of Oil Country Tubular (OCTL) -- once faded into seeming oblivion and now showing all signs of becoming a bestseller.

OCTL makes tubulars, casings and drill pipes for the oil drilling industry. These products are used primarily in the initial stages of exploration and development of oil and gas reserves. So hot is the growth story here that top institutions, both domestic and foreign, have been buying the stock in tonnes. As a result the stock is three times up from about Rs 12 in December.

 

This sudden love, however, will come as a shock to many hardened stock market punters, well aware of OCTL's tarnished reputation. It begins with the company being Hyderabad-based, topped by promoters who played with the stock during Harshad Mehta days. Already debt loaded, the company faced working capital problems and as losses piled up, the promoters even fudged accounts to avoid BIFR. At some point it also had problems with ONGC, unarguably the biggest domestic consumer of tubulars. Last heard was the use of political pressure to get a revival package through.

However, currently things stand changed, thanks to a happenstance. In June 1995, a US manufacturer of drill pipes and related equipment, Prideco changed hands. The operations of Prideco were combined with EVI's existing tubular business, Grant TFW, to form the new Grant Prideco entity. The acquisition solidified EVI's position as the world's leader in manufacture of drill pipes, and the largest North American maker of premium tubulars. Now, the facility at OCTL was built in 1990 under the direction of personnel currently employed by Grant Prideco. And EVI as a company was undergoing extensive restructuring, making focused strategic acquisitions in oilfield equipment. As a result, in January 1996 Grant Prideco signed a manufacturing and sales agreement with OCTL.

Essentially, EVI was looking for an exclusive use of OCTL's 75,000-tonne facility. It was in EVI's interest, since it was looking to increase its presence in Asia, to make use of OCTL geographical location to its advantage. The OCTL facility is reportedly the best in Asia. So, strapped for working capital, OCTL was granted six month credit for raw material supplies by EVI. EVI also made an one-time payment of $8 million for use of its facilities. Further, a fee of $500,000 was being made payable monthly in advance, beginning April 1996 for five years.

The main idea was to keep the plant up and running. And with ONGC making payments in 60 days, with a 6-month credit facility, OCTL enjoyed a working capital float. But who the end-customer was hardly mattered since EVI was committed to picking up OCTL's production if domestic orders did not materialise.

Currently, however, OCTL has major orders from ONGC. Apparently, the company has just bagged a Rs 200-crore worth order from ONGC and/or Oil India. For 1996-97, OCTL is expected to report a turnover of roughly Rs 190 crore and a meaningful sum as net profit. Next year turnover should near Rs 250 crore. But the turnover figures are not important. What will be critical and drive up the stock price is quality of earnings, which will happen as all hidden losses and bad debts will be wiped out in the current year. A favorable revival package (it was not a bad deal for the banks and institutions considering that Hyderabad-based companies have no great track record of repaying their debts) will result in reduction of principal and interest amount. A part of the interest liability has also been deferred.

But what if the promoters resort to old tricks? The positive side is that the $478 million EVI is around with three men permanently posted in Hyderabad. And as a part of the agreement EVI is taking care of planning, budgeting, pricing, plant maintenence and quality control among other things. There is a possibility that EVI could takeover OCTL in a couple of years. If that happens, the upside for the OCTL stock is anybody's guess.

The demand for tubulars, made up of casing and tubing, which line the walls of a wellbore and serve as a conduit for the hydrocarbons up the wellbore, is linked to drilling activity around the globe. A recent Standard & Poor industry report says "drilling activity in the US has increased steadily since hitting a 22-year low in 1994, and we expect the number of domestic rigs will continue to climb." It also says that at the end of Octo-ber, the international rig count was 785, against 754 last year.

The 1996 annual report of EVI also says "as long term secular trends continue to move drilling and completion activity into deeper and higher-pressure enviroments, the demand for premium tubulars will continue to grow. This is particularly true for deep water applications." Back home, ONGC for the first time will undertake deep water drilling. Needless to say anything more.

One last point. A major buyer of the OCTL stock has been Morgan Stanley. Pradoxically, that alone is keeping a lot of people away from the scrip given its domestic track record. But, says Manish Kanchan of Trends Holdings, "very few know that the price of the Morgan Stanley India Investment Fund, listed on the New York Stock Exchange, has risen from $8 to $13.25 in the last one year."