According to recent reports, there has been a delay in the onshore drilling schedule of ONGC on account of delay in the supply of rigs.
Shiv-Vani Oil and Gas Explorations (Shiv-Vani) had earlier bagged an order worth Rs1,610 crore from ONGC for charter hire of eight onshore deep driller rigs for the latter’s Tripura, Sivasagar and Rajahmundry assets for a period of three years.
As per our interaction with the management of Shiv-Vani, out of the eight rigs contracted, only three have been delivered as yet, two are in advanced stages of mobilization while there has been a delay in another three rigs for which the company are seeking extension.
Considering that the average day rate of the ONGC contract is about $25,000, the annual revenue from one rig works out to about Rs43 crore.
Taking into account a 5% penalty, the total penalty on the delayed three rigs could work out to about Rs6.5 crore. Consequently, it could potentially affect our earnings estimates by 2.3% to Rs44.8.
However, we are not taking this into account in our estimates on account of a lack of clarity on ONGC’s final decision.
Shiv-Vani has debt of about Rs1,400 crore in its books currently and the same is payable in about six years.
Delays or deferment in contracts, any renegotiation of contracts or fall in the operating profit margins going forward could potentially hamper its cash flows and remain risks.
At the current market price of Rs101, the stock discounts at 2.2x its FY2010E earnings and is quoting at an enterprise value/earnings before interest, depreciation, tax and amortisation of 3.3x.
We maintain our BUY recommendation on Shiv-Vani with a price target of Rs370.