Aban's debt and earnings woes resurface as rig sinks

Aban Offshore, India's largest oil rig company, is likely to come under increased stress for repaying debt after the loss of its semi-submersible rig, Aban Pearl, which sank in the early hours of Thursday, according to analysts.

Following the news, the company's stock fell 18.29 per cent on the Bombay Stock Exchange to Rs 831 a share on Friday, reflecting a loss of Rs 8.09 billion (Rs 809 crore) in the company's market value to Rs 36.13 billion (Rs 3,613 crore). The rig was the highest earning asset of the company with an operating day rate of Rs 16.1 million (Rs 1.61 crore) and the contract running till October 2014.

But market analysts say the decline in Aban's market value has made up for a large part of the potential loss to the company.

"Aban Pearl has a Rs 22.5 billion (Rs 2,250-crore) contract with PDVSA Venezuela (Petroleos de Venezuela SA) and earns an Ebitda and cash flow of Rs 3.38 billion (Rs 337.50 crore) and Rs 2.79 billion (Rs  279 crore) annually from the contract.

The NPV (net present value) of the current contract, assuming a 12 per cent discount rate, is Rs 11.37 billion (Rs 1,137 crore)," wrote Morgan Stanley analysts.

According to Ambit Capital, the incident would mean a loss of Rs 5,62 billion (Rs 562 crore) to the company's annual revenue and Rs 3.65 billion (Rs 364.5 crore) to its earning before interest, tax, depreciation and ammortisation.

 While estimates of Citi's analysts peg the annual Ebitda loss at Rs 3.02 billion (Rs 301.50 crore)(or 12 per cent of estimated 2010-11 Ebitda), analysts at Morgan Stanley estimate the Ebitda impact to be Rs 2.8 billion (Rs 279 crore).

The market's concern is not without reason. The company had a consolidated debt of Rs 16,635 crore as on March 2009, most of which was taken during its acquisition of Norway's Sinvest in 2006. Of the total debt, about Rs 4,500 crore is repayable in the next two years.

Explorations at high costs became unviable when Brent, the benchmark crude oil price, crumbled from a high of over $145 per barrel in July 2008 to just $34 per barrel on December 24 due to the economic slowdown. This downturn affected the demand for the rigs of the company. Aban Offshore saw as many as seven out of the total 20 rigs (including Aban Pearl) becoming idle, weakening its capability to repay the loan. The situation reached a flashpoint, with the Chennai-based drilling firm failing to repay Rs 200 crore of short-term debt in March 2010.

However, as oil prices recovered, the company has been able to deploy some, barring three, which are still idle. The company also got a breather when its lenders restructured its debt payments.

Care Rating, a domestic credit rating agency, in February assigned BB rating to the company's long-term bank facilities. Double B ratings are considered to offer inadequate safety for timely servicing of debt obligations. The rating revisions factors in the inability of the company to successfully refinance its bullet loans in a timely manner, Care said.

The concern that analysts are now raising is that Aban's ability to repay debt could get impacted in light of this recent incident.

"We believe that the negative impact on cash flows by about 20 per cent (Rs 292.50 crore) annually would seriously dent the company's debt paying ability, and hence, derail the de-leveraging process," said Saeed Jaffery, an analyst with Ambit Capital in his note.

As per Morgan Stanley estimates (see table), after considering the debt obligations and estimating Aban's cash flows, the company would have fallen short of Rs 15.8 billion (Rs 1,580 crore) and Rs 2.12 billion (Rs 212 crore) in 2011-12 and 2012-13, respectively.

But, considering that Aban Pearl has sunk, this funding gap would stand at Rs 18.72 billion (Rs 1,872 crore) and Rs 5.04 billion (Rs 504 crore), respectively. Jaffery has estimated a funding shortfall of Rs 12.82 billion (Rs 1,282 crore) over FY11-12.

Analysts estimate the impact on Aban's earnings is being estimated at about 20-22 per cent for the current and next financial years.

Meanwhile, since the rig, which had cost Aban Rs 9.5 billion (Rs 950 crore) plus refurbishment expenses (totalling about Rs 11.25 billion (Rs 1,125 crore), was insured for about Rs 10.8 billion (Rs 1,080 crore), the company could use the net inflows to lower its debt in the near-term.

Its ability to find a replacement for Aban Pearl and deploy its existing rigs soon could also help improve cash flows and ease market's concerns on debt repayment obligations.

While Ambit's analysts have changed their recommendation on Aban Offshore to 'sell' from 'buy', Morgan Stanley maintained its 'overweight' rating on the stock (awaits further clarity from the management).