Aban Offshore drops anchor for bigger play

Despite near-flat earnings every quarter, Aban Offshore’s valuation is on an upward trajectory. An attestation to this strange price behaviour is a new contract the firm has recently formalised. Aban, an offshore shipping company, has signed a new contract for Aban Abraham — a drill ship it owns.

The value is of the order of $123 million for a duration of 300 days, or approximately $4,10,000/day. The ship is currently employed at a day rate of about $3,00,000/day, a contract that will last till May 2008.

Effectively, the same asset of the company will fetch an additional $1,00,000/day or $36.5 million (Rs 160 crore) at the operating profit level for a full year — significant enough for a company that posted a net profit of Rs 84 crore last fiscal.

Aban has a number of other offshore assets as well, though none of them are in the same class as this one. However, most of them are operating on contracts concluded earlier, when rig rates were far lower.

As a result, Aban’s valuation remains high even though earnings won’t change for some quarters.

High expectations on contract rates in future have allowed the company to fund its recent $1.3-billion acquisition of a Norway-based drilling company. Demand for oil-drilling rigs for exploration and production has increased following the increase in crude price.

However, rigs are in short supply and construction of new rigs can take up to 2-3 years, which is why charter rates are expected to hold firm for some time.