Costlier crude: time for offshore services companies to perform?

Costlier crude: time for offshore services companies to perform?

With rising oil prices, oil companies, too, tend to increase their exploration and development activities. This in turn means good news for firms offering offshore services such as Aban Offshore Ltd and Great Offshore Ltd. Trouble is, both these stocks have underperformed in the last three months, when Brent crude has risen to about $116 per barrel currently from $94.

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In a note to clients on Tuesday, analysts from Prabhudas Lilladher Pvt. Ltd say that the impending issues such as equity dilution expected in both the firms, along with other stock-specific issues such as leverage in the case of Aban and an ageing fleet for Great Offshore, could be the reasons for the underperformance.

The note also highlights that global offshore firms have had a pretty strong run in the last six months and if activity in the broader offshore markets continues to do well, there is no reason why Indian companies will not sooner or later fall in line with the trend.

Aban would either have to consider an equity dilution or refinance its debt for its upcoming debt repayments, say analysts. Both are equally unappealing options. That’s because if refinancing happens at higher interest costs, it would put pressure on profitability, whereas equity dilution will lower earnings per share. Another concern is the political tension in Iran, as six of its 19 vessels are deployed there and are expected to contribute substantially to Aban’s revenue in the next fiscal.

Great Offshore, on the other hand, has delivered poor financials for the last two quarters. “The falling profitability in the past two quarters has seen the one-year rolling forward multiples contract in recent months to 5.2 times for P-E (price-earnings) and 4.7 times EV-E (enterprise value-earnings). FY11E (estimated) will be the third consecutive year of decline in profits. While the FY12E profit is set to double, we find moving forward the valuations are set to remain subdued and even contract," wrote analysts from the Fortune Group last month.

But with crude prices moving up, it may be time to become more optimistic on the sector.

Graphic by Yougesh Kumar/ Mint

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