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Great Offshore: New kid on the block - Views on News from Equitymaster
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Great Offshore: New kid on the block
Dec 21, 2006

Great Offshore Limited (GOL), the erstwhile offshore service arm of G.E. Shipping (GES) listed on the bourses today after its demerger from the parent, effective from October 16 2006. The stock opened at Rs 702 and made a high of Rs 798. Let us understand the business of GOL and what prospects does the demerged business hold for shareholders. About GOL
GOL’s current fleet stands at 38 offshore vessels (24 Offshore Support Vessels, 2 Drilling Rigs, 1 Construction Barge, 11 Harbour Tugs). Further, the company’s new building order book comprises 3 offshore vessels and 1 drilling unit, with an aggregate committed capex of around US$ 200 m to be spent in the next two years. The company’s de-merger from GES has resulted into creation of the second largest Indian offshore company with revenues that are more than double than the next ranked player in FY06. Great Offshore is also amongst the most profitable plays in this segment with net margins of 25%, next only to those earned by Garware Offshore.

Great Offshore: Where does it stand?
(FY06, Rs m) Revenues Profits OPM NPM EPS CMP P/E
Aban Offshore 4,902 823 56.1% 16.8% 22.0 1,220 55.4
Great Offshore 3,885 971 41.7% 25.0% 25.5 727 28.5
Dolphin Offshore 1,813 93 11.6% 5.1% 16.5 320 19.4
Jindal Drilling 982 50 3.8% 5.1% 5.6 320 57.3
Garware Offshore 309 106 44.3% 34.3% 7.3 270 36.8
Asian Oilfield 103 6 13.8% 6.0% 1.2 33 28.4
Source: Company reports, Equitymaster Research

What’s in it for shareholders?
Let us look back into the past and understand why the demerger from GES happened at the first place. Traditionally, global shipping companies have a leverage of upto 1 time their networth (debt to equity ratio of 1:1). This is because of the volatile nature of the global shipping industry. However, offshore companies can go for an aggressive leverage due to the stable nature of the business on account of absence of spot markets and longer-term duration of contracts. In fact, the debt to equity ratio in this business can go to as much as 2:1 or 3:1.

Thus, due to this demerger, GOL will have the ‘flexibility’ to leverage its balance sheet in a greater manner and borrow more for furthering its expansion plans, which was earlier dependent on the larger shipping business.

Also, this de-merger means value unlocking for the offshore business. This is because globally, stocks of offshore companies command price to earnings valuation of over 20 times. Considering the independent nature of this business in case of GOL, shareholders of GES (who have been assigned share on GOL) will stand to benefit in the long-term.

As per the scheme, GES’ shareholders have been issued, at no cost, 1 fully paid share of Rs 10 each in GOL for every 5 shares they held in GES. Also, since all shareholders have been issued shares in GOL on a proportionate basis, there has been no change in the overall shareholding pattern.

At the current price of Rs 727, GOL is trading at a price to earnings multiple of 28.5 times its FY06 earnings and 18.7 times its annualised 1HFY07 earnings. Considering the kind of potential that the global oil & gas exploration and production business holds, we expect growth for GOL to be on the higher side in the future. Also, the company will have greater leverage ability in its bid to expand to capture the growth opportunities. Thus, on a balance, we have a positive view on the stock from a long-term perspective.

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