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Hang-over of good times

Aban Offshore's fall in the market downturn has been a cruel one

We all know that the market conditions that have prevailed for the past 15 months have been bad. While most companies have been battered and bruised, for some the plummeting markets have been nothing short of downright barbarous. One such company is Aban Offshore, India's largest private sector offshore drilling services provider.

Aban's stock is down by 94 per cent from the peak it achieved on January 4, 2008. Its fall is just four per cent lower than the worst performing company on the Bombay Stock Exchange (BSE). The prime reason behind the stock being hammered so badly is the concern over the company's high debt position.

Aban Offshore was established in 1986 as an offshore drilling service provider to ONGC. The company started with two jack-up drilling rigs, which was increased to four with the acquisition of Hitech Drilling Services in 2003. The company currently owns a total of 21 rigs and is amongst the top offshore drilling service providers globally.

The global offshore drilling expenditure increased from $20 billion in 2005-2006 to $30 billion in 2007. Aban expected it to grow to around $55 billion by 2011. Anticipating a high demand for rigs, in 2006, it acquired Norwegian drilling company, Sinvest ASA for $2.2 billion, largely through debt. This added eight rigs to the company's fleet.

All was well as long as the oil prices were rising. The company's revenue grew by 321 per cent over the past three financial years. From Rs 505.42 crore in 2005-06, it grew to Rs 2128.05 crore in 2007-08. For the first nine months of 2008-09, it was Rs 2410.82 crore.

Even stock market was hardly concerned over the high debt position of the company, its stock price surging over 256 per cent in 2007. Its market capitalisation grew from Rs 500 crore in July 2004 to Rs 20,000 crore in January 2008. The stock ranked 73 by capitalisation among BSE listed companies.

But as the oil prices started to decline from July 2008, the company's performance started to get affected. In Q3FY09, net sales was almost flat on a Q-o-Q basis. This got the markets worrying about the company's highly leveraged position. It was then that the downfall began.

Aban had a debt of Rs 13,043.39 crore in its books as on March 31, 2008. With rupee depreciating more than 26 per cent since then, it is very likely that this loan by now is in the region of Rs 16,000 crore or above.

The market capitalization of the company on April 17, 2009 was just Rs 1,802 crore. It now ranks 204 by capitalization among BSE listed companies.

Under the current situation, when oil prices are falling and global economies are facing recession, the expenditure on oil exploration and production activities are unlikely to increase and can hit the demand for oil rigs. Currently, four of its oil rigs are idle and contracts of nearly five of them are going to expire in the coming six months. This will put immense pressure on the company's future cash flows.

Aban Offshore is a classic case of trying to grow too quickly without any contingency plan for the bad times-hang-over of good times. The company was too optimistic about its growth prospects and therefore didn't hesitate in taking the inorganic route. This story of Aban Offshore just reinforces the old adage: slow and steady wins the race.