Aban Offshore: ABAN RIG LOSS

Insurance cover a relief, but EPS may take a hit

THE Aban Offshore scrip crashed 19% on Friday after news broke out that its drillship, Aban Pearl, had sunk in Venezuelan waters.

The drillship, its most lucrative asset, was contracted till January 2015 and earned $358,000 per day. While the loss of this revenue flow can put a great pressure on Aban Offshore’s profitability and cashflows, there may be a possibility of the company resuming the contract with one of its idle assets. The 32-year old vessel was recently refurbished and was working on its maiden contract, post refurbishment.

The market is, however, assuming a worst-case scenario, where the company loses out on the contract and may take a big hit on its annual profits. The loss of profit from this single contract is estimated to shave off between Rs 49 and Rs 67 per share from the company’s EPS estimated for FY11, according to various analysts. Considering the average analyst consensus, which has pegged the company’s FY11 EPS around Rs 210, the fall could be as high as 30%.

Aban Offshore is likely to recover the full cost of the sunken vessel from insurance companies, which is estimated around $235 million — although the process may take a long time. This may enable the company to repay a part of its outstanding debt, which stood at $3.2 billion as on March 31, 2009.

The company has two idle vessels — Aban Abraham and Deep Venture — that could resume the contract on which Pearl was working. Such an arrangement can enable the company to plug the hole in its earnings created by this accident. However, with no details forthcoming from the company, this possibility remains speculative.
The unfortunate incident is a major blow for Aban Offshore as it had recently undertaken a major debt restructuring exercise and increased cash flows through new contracts. The company had recently infused nearly Rs 700 crore of equity and recast its debt obligations to spread out over 10 years, prompting industry analysts to take a favourable view on it.

Despite the accident and a possible negative impact on the company, most of the leading brokerage houses are awaiting clarity from the management and have kept their recommendations under review.