I bought shares of Aban Offshore in November 2009 at Rs 1,104 per share. Since oil prices have started to climb, emphasis on exploration and production is expected to increase. Should I hold or sell the stock?
- Amrit
The company recently lost one of its rigs - Aban Pearl - in the Caribbean Sea. Although the asset loss was insured, market sentiment has been negative and hence the stock price has been falling.
The company has a five-year compounded annual EPS growth rate of 40 per cent, and its PEG ratio is also an attractive 0.32 (as on May 17, 2010). However, its main drawback is a high level of debt. The debt to equity ratio stood at 9.54 at the end of March 2009. For FY11, meeting its debt obligation will not be difficult. There could, however, be some pressure in FY12 if the sum insured is not paid by then. The company will, however, face a trying time in FY13 and FY14 when USD 700 million comes up for repayment.
The major chunk of Aban Offshore's earnings comes from renting its rigs. This business depends heavily on the price of oil. In 2008 when the environment was gloomy and oil prices had plummeted, Aban Offshore's rig contracts were cancelled. With the world economy once again under pressure, the direction of oil prices is uncertain. In our view, you should sell this stock and invest in one driven by domestic demand.
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This article was originally published on June 29, 2010.
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