Ready To Set Sail

Offshore support companies are all ready to throw their weight behind the hectic activity going on in the petroleum E & P space

NOTWITHSTANDING THE bull mania on the bourses investors seem to have overlooked offshore support services sector in ’07, leading to its relative underperformance vis-à-vis benchmark indices. Ironically, this has happened at a time when oil prices are quoting at an all-time high, which bodes well for exploration & production (E&P) activity worldwide. The E&P activity in India too has picked up with six rounds of NELPs already over and the seventh expected in the near future. With heightened petroleum exploration activity in India as well as the world over, the demand for services and assets that offshore support companies provide has grown tremendously. And the bulging capex plans of E&P majors like ONGC and RIL ensure that the demand for offshore support services will remain strong in the future as well.
However, most of the companies supporting these petroleum heavyweights in their offshore exploration activities have grossly underperformed the benchmarks in ’07. And this is despite their outperformance during ’05 and ’06. While the fundamentals of the industry have not weakened, the stock performance of companies like Dolphin Offshore, Garware Offshore and Seamec has taken a hit in ’07. Even the largest private sector fleet owner Great Offshore has underperformed since it got listed in December ’06.
One of the main reasons behind this lull is that the industry is currently passing through an investment phase and all the companies are awaiting deliveries of a number of vessels over the next 12 months. Industry leader Aban Offshore has been an exception mainly because it has doubled its asset base through acquisition of Sinvest via a leveraged buyout.
Since it spun-off last year, Great Offshore’s fleet has been undergoing a phase of heavy dry-docking and upgradation, with the company having invested over Rs 130 crore till date on the exercise. The dry-docking and upgradation work meant heavy expenditure on the one hand and loss of revenues on the other, as the vessels remained idle. However, with this phase getting over the company is likely to perform better in the coming quarters. Making The Right Moves
BOTHits rigs as well as the MSV (multi-support vessel), which was commissioned recently, will be on charter from Q3 FY08 onwards. The company has ordered for a drilling rig – for which it has already secured Rs 1,000 crore contract for fiveyear duration – and an MSV to be delivered in FY10. The company has also raised nearly Rs 320 crore over last one month and is believed to be planning some acquisition.
Seamec has also augmented its fleet of three MSVs by buying one diving support vessel. Despite substantial delay in the deployment of the new vessel, the company has performed well in the past couple of quarters. The new vessel is likely to commence operations by the October ’07, adding substantially to the company’s revenues, which is trading at a significantly lower P/E of 10.
Dolphin Offshore’s stock has also suffered due to unbilled expenditure on a couple of contracts and higher dry-docking expenditure. Over the past few quarters, it has moved up from being a sub-contractor to a main contractor and won several big-ticket contracts. Its current unexecuted order book stands at Rs 230 crore, which is more than its revenues for FY07. Two workboats and one construction barge are scheduled to join its fleet over the next 12 months. It is aiming for a sustainable 40% growth over the next three years.
Garware Offshore, which gained over 1,400% in market capitalisation after its dream run in ’05 and ’06, has posted a 27% fall during ’07. This was mainly because the company had to dilute equity to finance the acquisition of vessels. It presently owns a fleet of 3 PSVs (platform support vessels) and 4 AHTs (anchor handling tugs) and will add two AHTs and two PSVs over the next 15 months to its fleet. It has also obtained the exclusive rights from a Norwegian company to market its ships and ship designs in India. It aims at a turnover of Rs 90 crore with profits of Rs 30 crore for ’07.
Considering India’s dependence on imported crude oil, the efforts in E&P will continue unabated even in the event of a global economic slowdown. Also, the government will award around 60 oil blocks under the seventh round of NELP by end’07. These new exploration activities, along with routine maintenance and repairs, replacement of old assets and redevelopment of ageing oil fields offer excellent growth opportunities for the domestic players in the offshore support industry. Investors with investment horizon of 6 to 12 months can consider investing in these companies