I am happy to state that your Company reported fairly satisfactory
results in a challenging 2005-10.
These are the consolidated numbers:
- A 10.12 per cent increase in operating income
- A 21,22 per cent increase in EBIDTA
- A 65.67 per cent increase in core profit after tax
The fact that the Company reported positive cash accruals and
botlomlineon the one hand and could propose a dividend in the most
challenging period in its existence on the other, is an index of the
robustness of its business model.
Overview
The business of charter hire of rigs has a strong positive correlation
with the prospects of the oil industry. The lower the oil prices, the
weaker the demand for rigs and vice versa.
In this connection, the movement in oil prices in 2008-09 and 2009-10
provide
a fair commentary on what has transpired in our business. During the
first half of 20OB-09, oil prices peaked and oil rig demand rose to an
all-time high. From the second half onwards, oil prices bottomed out as
low as USS40 a barrel in December. Correspondingly, rig hire demand
collapsed as a number of oil companies - sitting with large investable
surplses - preferred to wait and watch. When oil prices did more than
double from their bottom, rig utilisation imoroved significantly; rates
were expected to pick, up after a significant pick-up in utilisation,
It is this challenging and changing background that made our
performance in 2009-10 creditable.
Challenges and initiatives
With a number of large and mid-sized oil drilling customers staggering
their fresh capex programmes, drilling activity declined. In a
capital-intensive business like ours where a significant part of our
asset creation was financed through aest. our margins were
squeezed, if not wiped out in 2009-10,
Our Company did not just wart for the storm to blow over. It utilised
every opportunity in a challenging year to strengthen its business.
Aban placed all its rigs across comfortable tenures and rates. The
Company entered relatively new markets in Latin America. West Africa
and the Middle East to work with companies possessing a dependable
capex programme. Besides, It signed a contract for the deployment of
one jack- up rig with Brunei Shell Petroleum of Brunei.
The result was an Increase In rig utilisation, which immediately
translated into an Increase in quarter-to-quarter core profit after tax
horn the third to the fourth. Rig utilisation rates, which were low
till September 2009 improved substantially in the second half of the
financial year 2010.
Strengthening the business
Cost management: The Company assumed operational control of eight
new rigs that had earlier been vested with a rig management company.
The Company leveraged Its rich hands-on business understanding to halve
the operating cost structure and also enhance its experience of
managing these assets in global waters,
Debt management: Aban commenced 2009-10 with a debt book of Rs. 16,600
crore and a gearing of 9.54 tiroes. in view of the external
environment, the Company considered it prudent to work closely with its
banking consortium, successfully rolling over its debt so as to oe
repayable over a longer period in Keeping with the long-term hie 0- the
Companys assets- This vindicates the fad that financial institutions
view Allans business model as robust and credible.
The Company also mobilised Rs. 698 crore through a Qualified
Institutional Placements (QlP) in November 2009. Utilising the
proceeds to nationalise its gearing to 6.5 times.
Interest management: We believe that our interest outflow outlook for
2011 -12 is comfortable when appraised against our earning capability.
As the revenues are also in US Dollars, there is a natural currency
hedge.
Business booking: Aban deployed its Hgs across varying tenures,
reducing business risk. Besides, the short-term contacts will enable
the rigs to be placed at better rates in view of the improving global
environment.
Pnrtfolio diversification: Aban is competitively placed to address a
growing market through its diversified asset portfolio {15 jack-up
rigs, three drillships and one floating production unit). An average
age of nine of its 15 jack ups being around 2.5 years (as on 31st March
2010) translated into attractive hire rates.
Health and safety standards: Aban improved its HSE standards and
compliance levels and benchmarked the same in line with the best global
standards, resulting in contracts from global ESP companies.
Outlook
Oil industry: World oil demand is expected to grow 1.1% in 2010-11 to
85.2 mb/d. This will he catalysed by thel growng demanc from developing
economies where oil consumption Is forecasted to grow 0.6mb/d y-o-y in
2010 to 26.4mb/d, Hence even as European oil demand is expected to
contract by 0.2mb/d in 2010 on account of defining consumption in the
big four* economies (Germany, the UK, France and Italy), Chinas oil
consumption is expected to increase by 160,000 b/d (Source: OPEC. In
India, the highest number of exploration blocks - 70 blocks covering
about 1,63,535 sq. km - were awarded under NELP VIII. Some 24 blocks
were deepwater, 28 shallow, eight land and 10 Type-S blocks (Source:
dconomic Survey 2QQ9-W}. This programme indicates a resurgence in
demand for rigs across the foreseeable future across Asia.
Rig industry: Rig rates for Jack-ups hardened during 2006. began to
correct In 2006 and were around US0,000- 130,000 per day {depending
on their age), in 2009. The industry insight is that rig hire rates
have bottomed out, what with utilisation picking up rrum 81% to 86%
in the latter half of 2009 and are expected to rise to 87% in 2010,90%
in 2011 and 95%-plus in 20-2 (Source: Deutsche Bank Securities).
Interestingly, utilisation is expected to increase on account of
stronger demand without any corresponding dedine in rigs supply, On
the supply side, 32 jack-up rigs are expected to be delivered in 2010,
a growth of 7% over the previous year. based on prevailing evidence,
even the slightest jack-up demand recovery is expected to stabilise
rates in the second half of 2010 (Source: Deutsche Bank Securities).
Technataglcal shift: The floaters market (midwater, deepwater and
ultra- deepwatef) seems Io be the rig industrys future. Latin America
and West Africa appear promising for UDW rig deployment. The market for
deepwater and uftra-deepwater rigs is relatively less populated owing
to the requirement of enhanced technology and higher capital investment
2010-11
An Improving global economy is expected to strengthen the crude demand
and prices. In turn, this will encourage investments in ESP activity
and strengthen the demand for offshore rigs,
Thus shareholders an expect their Company to strengthen its
competitiveness and emerge stronger in the challenging environment
through the fallowing initiatives.
Aban is competently placed to capitalise on this projected upturn for
some good reasons; it is the largest drilling contractor in India and
one among the ten largest offshore drilling contractors in the world.
The Company possesses a varied asset portfolio including the deployment
of Aban Abraham (a drill ship capable of going down to 6,600 feel). The
robust response to its QIP issues from institutional investors
indicates a deep faith in the credibility of Its business model. On the
other hand, the Company will remain vigilant for asset opportunities,
especially for underwater assets that ate capable of drilling down to
10,000 feet and below. Besides, the Company has no significant capital
expenditure scheduled for 2010-11, leaving it with an adequate surplus
with which to pare its debt further.
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