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Floating On A Sea Of Debt
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Recession has taught the world one valuable lesson — always expand your business in a bear phase and not the other way round. Chennai-based Aban Offshore, India’s largest offshore oil drilling contractor, which ventured out in 2006 to acquire Norwegian drilling major Sinvest at an enterprise value of $2.2 billion, mostly in debt, is learning this in a rather harsh manner.
Though the acquisition of Sinvest when the stockmarket was soaring added instant power to Aban’s global operations with eight more jack up rigs to take the total to around 20 at a time when oil prices were northward bound, it brought in a huge $3.1-billion (Rs 15,800 crore) debt in a balance sheet of Rs 2,000 crore-plus, mainly through borrowing from a clutch of banks including ICICI Bank, Punjab National Bank (PNB) and Axis Bank, and partly through bonds worth 1,000 million Norwegian Krone or $207 million.
Soon the unthinkable happened for Aban. Crude prices crashed to $40 per barrel from $147 per barrel in July 2008, hitting large exploration plans of global oil majors. As these investments were committed by pegging crude at a lower limit of $60 per barrel, anything below this benchmark made no economic sense.
While every offshore drilling company was hit, analysts say Aban was affected more due to high leverage of 16 times. The lenders are now seeking a rescheduling of the entire or part of the loan.
Manoj Bahtey, analyst at Edelweiss Capital, says the debt-equity ratio for 2007-08 was 16 times. Considering the non-convertible redeemable preference shares as debt, this would be 26.3 times. Preference shares are redeemable at par during 2011 and 2012. “The loan book has increased from Rs 1,100 crore in 2005-06 to Rs 13,000 crore in 2007-08 primarily due to the Sinvest acquisition,” says Bahtey. “Of this, loan repayable in 2008-09 is Rs 1,700 crore — eight times the net cash from 2007-08 operations.”
Aban’s problems are more complex; it needs to get contracts for idle rigs, which will provide much needed cash flow to service the debt. Currently, out of total 21 rigs, only 15 are working and six major rigs are lying idle. The rig, Deep Driller 7, is looking for new contract while the delay in the deployment of high-end rigs, Aban Pearl and Aban Ice, has cut down the cash flows further. The operating day rates may come down on worsening economic woes and lowering viability of projects. Comparatively, nearest competitor Garware Offshore had better revenue mix due to re-pricing of assets at higher day rates in spot market and timely addition of two new vessels, while Shiv Vani Oil and Gas Exploration Services has tied up contracts for all new assets.
Dhaval Joshi, analyst at Asit Mehta Investment Intermediaries, says that given the depressing conditions, the demand for rigs will not be as strong as in the past and with E&P companies deferring their exploration plans further, day rates, which ruled at $400,000, may come under considerable strain. “Since Sinvest rigs are on short-term contracts, there may be gaps in contracts in 2009-10,” he says. Aban Offshore had disappointing results in the third quarter of 2008-09 with sales remaining flat (sequentially) at Rs 836 crore and net profit at Rs 250 crore, down 4 per cent. The saving grace was the other income of Rs 160 crore from forex gains on the restatement of Norway Kroner denominated bonds.
The crisis may not be immediate but could ruin its future party. Analysts say that while interest servicing is not an issue, servicing the principal is, and that is forcing the company to refinance the debt. True, the company can find solace in the $3-billion order book, which adds some certainty to the cash flow for now, while it had cash and cash equivalents of Rs 645 crore last financial year. But with the market factoring in future agonies of Aban, the stock has come down from Rs 4,292 to trade currently at Rs 236, making an equity dilution a more offshore dream.
(Businessworld Issue Dated 17-23 March 2009)