BackAban Offshore’s prospects skid on low oil prices
Falling oil prices, slowdown in major economies in Europe and China have raised concerns on utilization rates and per day hire charges of drilling rigs
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The underperformance of Aban Offshore Ltd’s stock against the broader indices over the last one year is not surprising. Plummeting oil prices and the slowdown in major economies in Europe and China have raised concerns globally on utilization rates and per day hire charges of drilling rigs, which is Aban’s business segment. The company’s shares, therefore, have been on a downhill path despite the S&P BSE 100 index gaining handsomely in the past year, and the downturn has been sharper since January.
A better-than-expected performance in terms of operating profit margin in the December quarter failed to lift sentiment on the Street, as dim prospects loom over the company. In spite of a minuscule revenue growth, profitability rose from the year-ago period, driven by lower material and insurance costs. Although Aban has a strong clientele comprising the top 25 global drilling companies, challenges have mounted for the sector with the crash in the price of crude oil.
Global utilization rates for drilling rigs have declined to 79% from 84% a year ago, with a significant addition of new rigs too, thanks to a 60% drop in the crude oil price. Rig rentals are down by nearly 20% internationally, which implies poor drilling activity.
The scenario is equally bad in jack-up rigs, which account for nearly three-fourths of Aban’s fleet portfolio. Pulling it further into a quagmire is the addition of about 173 rigs globally to the existing fleet, which will exert pressure on the rates, due to oversupply. For industry utilization and rates to get better, the oil price has to recover sharply, which experts believe is unlikely for at least the next two years.
Specifically, a significant part of Aban’s fleet comes in for contract renewal in the current fiscal year, which does not augur well, given the state of the industry. Further, a recent report by Kotak Research says, “The high balance sheet leverage and ageing of Aban’s fleet makes us cautious about its fundamentals." The report also highlights that nine out of the 18 rigs are aged between 31 years and 41 years, which will make it difficult to compete with newer rigs that are better compliant with safety norms and have higher performance standards.
The last few cycles in oil prices show that recovery is a slow process of four-five years. Further, Aban Offshore, whose shares trade at around ₹ 441 apiece, had an opportunity to unlock value through an intended listing of its Singapore subsidiary. That seems distant now given that the sector is in troubled waters.
The writer doesn’t own shares in the above-mentioned companies.
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