Shares of Aban Offshore Ltd have risen by 9.3% on higher-than-usual volumes in the past two trading sessions. According to news reports, the trigger was a research study by Kotak Institutional Equities upgrading the stock to a “buy” because of rising crude oil prices. The recent underperformance of the company’s shares also contributed.
Since early October, the company’s shares had fallen by around 17% on the National Stock Exchange before the current two-day rally. In contrast, the S&P CNX-500 index had declined by only 5%. This was despite the fact that crude oil prices had risen from under $75/barrel in early October to over $90/barrel currently. This augurs well for the oil exploration and production sector.
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Kotak’s report points out that four of Aban’s jack-up rigs are due for renewal in the next six months. The company should be able to negotiate higher rates for them given the buoyancy in crude oil prices. Its report states, “We see the recent sharp increase in crude oil prices as a positive for the offshore drilling services industry as it will encourage higher investments into the E&P (exploration and production) sector, which in turn will improve the demand-supply balance for the rigs.”
Aban’s shares had plummeted earlier this year after one of its semi-submersible offshore drilling rigs called Pearl sank. At one point the shares had fallen by over 35%, though the stock recovered some of the losses after the company received compensation from its insurers. Based on the stock’s current levels, nearly half of the losses have been recouped.
Still, there are concerns about the company’s highly leveraged position. According to estimates by Emkay Research, the company is likely to end the year with a net debt/equity ratio of nearly 6 times and a net debt/Ebitda (earnings before interest, tax, depreciation and amortisation) ratio of over 5 times. Needless to say, the high debt is likely to keep a check on the company’s share price. While there may have been some merit in the argument that Aban shares had needlessly underperformed, especially given rising crude prices, it would be a stretch to say that the shares should now outperform.
Graphic by Yogesh Kumar/Mint
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