Aban Offshore: profits hinge on bringing down debt
Aban Offshore: profits hinge on bringing down debt
As of 30 June, Aban carried a debt of Rs15,922 crore in its books, which came down to around Rs13,500 crore by December. High debt cost was a result of the sudden ownturn in market conditions. In FY08-09, Aban’s acquisition of four new rigs coincided with plummeting oil prices. Consequently, business for rigs dropped and the company was unable to service the huge debt.
Fortunately for Aban, the story has changed in the last six months. Oil prices have ruled firm at around $70 (Rs3,185) per barrel of crude and experts have forecast an 8-10% increase in spending by oil firms on exploration, which augurs well for Aban. “The current break-even crude price is about $60 per barrel," explains Saeed Jaffrey, analyst with Ambit Capital Research.
However, concerns are on the four idle rigs, which will affect both revenue and profit. People familiar with the situation say that Aban intends to relocate these rigs to viable regions where they will get better contracts. If this works out at good rates, the operating profit margin (OPM) would improve, too. Global peers operate with a leverage ratio of 2:1, and OPM of 56-64%. Aban’s OPM improved to 62% in the December 2009 quarter from 56% in the December 2008 quarter.
But what is important is that Aban works towards its commitment to deleverage the balance sheet. Debt would otherwise weigh down profit. Only volatile oil markets, drop in crude prices or too many idle assets across the industry could upset Aban’s plans. For example, lower-than-expected rates in the December 2009 quarter disappointed analysts with a lower-than-expected net profit of around Rs89 crore. Besides, with 80% of its assets already locked into contracts until FY12, one cannot expect any surprises in revenue until then.
Write to us at marktomarket@livemint.com
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