Offshore drilling services firm Aban Offshore Ltd continues to improve its performance every quarter since the June quarter of fiscal 2011, when one of its premium assets (rigs) sank, impacting revenue and profits.
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Its March quarter consolidated revenue rose 16% over the December quarter, mainly as two rigs were utilized for a higher number of days. But this was a tad lower than analysts’ estimates because they included fresh chartering of one of its assets, which was delayed.
However, improved revenue offset costs to improve operating profit in the last three quarters.
More importantly, the March quarter’s operating margin improved by 150 basis points (bps) from a year-ago. One basis point is one-hundredth of a percentage point. Further, Aban’s exit from its troubled Norwegian joint venture—due to which it had incurred hefty losses every quarter—is a good sign.
Contrary to expectations of a loss, the firm gained around Rs 45 crore from the transaction.
But, there was an exchange loss as the firm redeemed convertible bonds during the quarter. The good news is that only two of its 18 assets are idle, and will be contracted in the near term. But the key question is whether it can command high day rates with its aging assets.
Analysts say that while two of its older assets have been contracted for three years, implying sustained cash flows and revenue visibility, the present contracts are at around one-third of earlier rates. This could thwart revenue growth rates. Aban’s shares have risen following the announcement of results.
The Street perceives that improving cash flows from operations will aid the deleveraging story. Debt at the end of the March quarter was around Rs 13,600 crore, translating into a debt-to-equity ratio of 6:1.
Over a two-year period, the firm’s repayment plan should see it down to at least half. Towards this end, the management has said that it will raise funds through qualified institutional placement of equity and foreign currency convertible bonds. If this works, operating profits could trickle down to improved earnings. Of course, while Aban’s stock trades at barely six times its one-year forward estimated earnings, macro factors such as the crude prices and interest rates impact sentiment. Valuations, although reasonable, will improve only when it steers clear of its debt burden.
Graphic by Sandeep Bhatnagar/Mint
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