Bangalore: In an ironic twist, a company whose promoter lost control over it because of the global financial turmoil and decline in crude oil prices is now being chased by two local shipbuilders seeking more revenue stability and to support their core business of building ships.
ABG Shipyard Ltd and Bharati Shipyard Ltd, India’s top two shipbuilders outside of state control, are battling each other to grab offshore oilfield services firm Great Offshore Ltd, which fell out of the hands of Vijay Kantilal Sheth in May.
If the global crude oil price rebounds to the highs seen in July last year, among the first beneficiaries would be firms owning vessels used to support offshore oil drilling operations because exploration would become lucrative once again. Crude prices are hovering at about $67 (Rs3,249) a barrel, up from less than $40 a barrel in March, but nowhere near the July high of $147.
“Unlike normal shipping business, which is highly cyclical in nature, the business of running ships that support oil exploration is far less cyclical,” said a shipping analyst at a Mumbai-based brokerage. He did not want to be named because of company policy on speaking to the media.
Difficult times: If the global shipping market doesn’t improve significantly over the next one-two years, both ABG Shipyard and Bharati Shipyard won’t have any orders to build ships after 2012. Ashesh Shah / Mint
Ships used to support oil exploration are typically hired by oil firms for periods ranging from three-five years, bringing stable revenue for their owners.
On the other hand, if the global shipping market doesn’t improve significantly over the next one-two years—this again is dependent on the health of the global trade, financial markets and economy—both ABG and Bharati won’t have any orders to build ships after 2012.
As things stand today, it is becoming more and more apparent that shipyards will face order cancellations and deferments of their shipbuilding contracts. If new orders dry up completely, yards such as ABG and Bharati would be badly hit.
“Hence, they need to diversify their portfolio,” said Navindar M., analyst at Mumbai-based Natverlal and Sons Stockbrokers Pvt. Ltd. “Acquiring an oilfield services firm such as Great Offshore is the best chance they have to ensure some new shipbuilding orders.”
“Getting into the oilfield services business will also give them much more revenue stability and also supports their core business of building ships,” he added.
Bharati, for instance, is building an oil drilling rig and a support vessel for Great Offshore, together worth about $220 million. Out of this, Great Offshore has already paid about $170 million to Bharati.
Besides, a big portion of Great Offshore’s fleet of 41 ships has to be replaced over the next few years, bringing captive business to the entity that succeeds in acquiring Great Offshore.
Firms owning support vessels used in oil drilling operations say the acquisition of Great Offshore would help either ABG or Bharati to venture into the oilfield services business quickly on the strength of Great Offshore’s experience.
Oil explorers typically look for operational, technical and financial experience in firms while hiring support vessels from them.
“The entry rules for new firms venturing into the support vessel supply business are quiet stringent. By acquiring an established services firm such as Great Offshore, which has a big customer base, ABG or Bharati could leap-frog into the services business without waiting for years to gain experience if they were to do it alone,” said an executive at a Mumbai-based offshore logistics firm who has worked with Great Offshore earlier. He did not want to be named.
Sixteen of Great Offshore’s fleet of 41 vessels are capable of servicing the deep-water oil exploration market.
Vijay Sheth had to pledge his shares with lenders to raise funds for buying his holding in Great Offshore during the demerger from Great Eastern Shipping Co. Ltd in 2006. In October, lenders started putting pressure on Sheth after the stock price of Great Offshore was hit by the global financial turmoil and the fall in crude prices.
With the stock price of Great Offshore plunging to below Rs300 from the allotment price of Rs850 in 2006, lenders had sought to sell the stock pledged with them to recover the loan if Sheth wasn’t able to meet the shortfall in the share price. Sheth then pledged his shares with the promoters of Bharati Shipyard for a Rs240 crore loan. When he failed to repay the loan, promoters of Bharati invoked the pledge in May and acquired the 14.89% stake Sheth had pledged.
But paying too high a price for a strategic asset with debt capital is a risky game, cautions Navindar at Natverlal and Sons.
On Tuesday, Bharati acquired a 4.58% stake from Bharat Sheth and Ravi Sheth, the promoters of Great Eastern Shipping and cousins of Vijay Sheth, at Rs403 per share, raising the shipbuilder’s stake in Great Offshore to 14.97%.
“Bharat Sheth is one of the most astute investors. If he doesn’t see value in Great Offshore’s stock at more than Rs403 a share, I don’t think the fair price of the company’s scrip would be anything above this mark,” the Mumbai-based shipping analyst mentioned earlier said.
For the two companies that are slugging it out, Great Offshore promises to be a hedge against the risks in their main business of constructing ships.