For Aban Offshore Ltd, the loss of the Pearl natural gas platform couldn’t have been worse-timed. The accident off the Venezuelan coast will hit its cash flows soon after the company had charted out a course to repay its mounting debt.
Aban had run up a huge debt following its Norwegian acquisition Sinvest AS and the purchase of four new rigs. To make matters worse, this had coincided with a drop in oil prices. In December, debt on its books stood at around Rs13,500 crore.
Graphic: Paras Jain / Mint
Around six months ago, the recovery in the oil sector had brought relief for Aban. Out of Aban’s 20 assets, 18 were productively deployed. The company had planned to repay debt of $1.025 billion (Rs4,622 crore) in fiscal 2011 and 2012.
These plans now seem to have run aground.
Aban Pearl was visibly among the company’s highest earning assets, accounting for nearly 30% of total earnings. It was contracted at an operating day rate of about $350,000 by Petroleos de Venezuela SA (PDVSA) until fiscal 2015. The asset was to generate annual revenue of about $125 million every year for the next five years. According to a report by Ambit Capital Pvt. Ltd, the negative impact on cash flows by around 20% annually would seriously dent the company’s debt paying ability and, hence, derail the deleveraging process.
Would a successful insurance claim help the company? Analysts estimates on the insurance claim vary between $235 million and $250 million. Pearl was a 30-year-old drilling ship bought in September 2007 at a cost of $250 million. A large part of the claim, however, would be used to repay the debt pertaining to the Pearl rig. According to reports, the debt pertaining to the Pearl asset is $175 million. After paying that, Aban would have only $60-75 million left to repay other debt. It should also be noted here that insurance payments take time to materialize, which may put further strain on Aban. Besides, it does not have a “loss of profit” coverage. Insurers typically don’t provide this coverage to the industry as they operate under uncertain conditions.
Company officials hint that they may replace the asset after two months, which could revive cash flows. But this may mean a fresh contract at a re-negotiated rate. In fact, recently Maersk Oil terminated a contract with Aban, resulting in a $12 million adverse impact on the operating profit.
The only silver lining is that some of its rigs have won new contracts. Aban has two idle drilling ships. But according to a Credit Suisse report, the Pearl accident could slow ongoing negotiations that Aban may have for these rigs as well—especially if there is a hint of operator error. This would exert further pressure on near-term cash flow and earnings estimates.
After the accident, analysts revised their earnings estimates down for fiscal 2011 by nearly 30%. The cash flow crunch may mean that the impact on the company’s financial health could be worse, and this is reflected in the weak sentiment for the company’s shares.
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