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Aban Offshore: Growth in the offing? - Views on News from Equitymaster

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Aban Offshore: Growth in the offing?

Jan 18, 2007

Performance summary
Aban Offshore Limited (AOL), India's leading offshore services company, had recently announced its results for the third quarter and nine months ended December 2006. While topline growth for the quarter was subdued at 5% YoY, the bottomline grew by a decent 12% YoY. Operating margins contracted by a sharp 310 bps to 54.8% in 3QFY07. The performance for 9mFY07 was much more muted, with a minuscule 2.4% YoY growth in sales and a very marginal net profit growth.

Performance Snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net Sales 1,207 1,261 4.5% 3,699 3,788 2.4%
Expenditure 508 571 12.2% 1,572 1,789 13.8%
Operating Profit (EBDITA) 699 691 -1.1% 2,127 1,999 -6.0%
EBITDA margin (%) 57.9% 54.8%   57.5% 52.8%  
Other income 31 56 83.2% 115 243 110.8%
Interest 116 96 -17.1% 352 325 -7.6%
Depreciation 243 241 -0.8% 731 745 2.0%
Amortisation 16 16 0.0% 47 47 0.0%
Profit before tax 354 394 11.2% 1,114 1,126 1.1%
Tax 170 186 9.4% 495 506 2.1%
Net profit 184 208 12.8% 619 620 0.2%
Net profit margin (%) 15.3% 16.5%   16.7% 16.4%  
Effective tax rate (on PBT) 48.0% 47.2%   44.5% 44.9%  
No. of Shares (m) 36.9 36.9   36.9 36.9  
Diluted earnings per share (Rs)*         22.8  
Price to earnings ratio (x)*         72.0  
* On a trailing 12-month basis            

What is the company's business?
AOL was set up in a technical collaboration with Chiles Offshore, US in 1986 with two jack-up rigs. Since then, the company has steadily expanded its fleet to become one of the largest rig operators in the country, second only to ONGC (captive). The company currently operates six jack-up rigs, one floating production unit (FPU) and two drillships.

Current Fleet*
Rig Name Type
Aban II 200ft Jack-Up
Aban III 300ft Jack-Up
Aban IV 300ft Jack-Up
Aban V 300ft Jack-Up
Aban VI 250ft Jack-Up
Aban VII 250ft Jack-Up
Aban VIII* 375ft Jack-Up
Frontier Ice Drill Ship
Tahara FPU
Aban Abraham Drill Ship
*Excluding Sinvest rigs ** Under construction

In 2006, AOL acquired 40% stake in Norway-based Sinvest ASA for about USD 528 m. Sinvest currently has three rigs in operation and five more rigs under construction. A strategic control in the company would make Aban Offshore one of top ten rig operators in the world.

What has driven performance in 3QFY07?
Topline growth not a worry: Since rigs are on long-term contracts, topline growth can come only from re-pricing of rigs at higher day rates or increase in the number of rigs operated. In FY06, the company acquired two rigs one 375ft Jack-up (Aban VII) and one drill ship (Aban Abraham). Since this rigs were not in operation for the period under review, the sales growth for the quarter and nine-month period was subdued. We believe that the commencement of operations by the newly acquired rigs and re-pricing of older operating rigs at higher day-rates will lead to strong topline growth going forward.

Higher other expenditure impacts margins: Operating margins contracted from 57.9% in 3QFY06 to 54.8% in 3QFY07. This was mainly on account of higher staff and other costs (primarily comprises 'drilling services and management fees' and 'consultancy and professional fees'), which as a percentage of sales, increased by 100 basis points (1%) and 280 basis points (2.8%) respectively. Rental charges and repairs to machinery, however, witnessed a decline, thus reducing the pressure on margins.

Cost details
(% of sales) 2QFY07 3QFY07 9mFY07 9mFY07
Stores and spares consumption 11.2% 11.6% 11.4% 11.1%
Staff cost 4.9% 5.9% 5.4% 6.3%
Rental charges for machinery 3.5% 3.2% 3.5% 3.3%
Repairs to machinery 4.6% 2.2% 4.3% 3.6%
Insurance 4.6% 6.5% 4.5% 6.5%
Other expenditure 13.2% 15.9% 13.5% 16.4%

Lower interest, higher other income aid bottomline: Despite the decline in operating margins and slower topline growth, net profits managed to grow by 12% YoY. This was primarily due to decline in interest costs (17% YoY) and higher other income (83% YoY). As a result, net margins improved by 120 basis points to 16.5%.

What to expect?
At the current market price of Rs 1,639, the stock is trading at 72 times its trailing 12-month earnings. As explained earlier, the stagnant growth in earnings and profitability for AOL is mainly on account of fixed day-rates for its rigs and lack of induction of any new rig. The same is, however, expected to change as six of its operating rigs are up for re-pricing in the next 15 months, with one already priced at twice the old rate. Since contracts are negotiated six to 12 months in advance, the probability of these rigs getting booked at better rates is high. Also the newly acquired rigs, Aban VII and Aban Abraham are expected to commence operations in 4QFY07.

Rig Contract Status
Rig Name Type Client Contract Day Rate Contract Validity
(USD' 000)
Aban III 300ft Jack-Up ONGC 55-58 Jan-08
Aban IV 300ft Jack-Up ONGC 55-58 Nov-07
Aban V 300ft Jack-Up ONGC 55-58 Jan-08
Aban VI 250ft Jack-Up Oriental Oil 35-40 Oct-07
Frontier Ice Drill Ship ONGC 40-45 Mar-08
Tahara FPU Hardy 25-28 Jul-07

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