Aban Offshore Ltd., Asia’s third-most-indebted oil rig provider, will be able to obtain cheaper U.S. and European financing following the easing of some sanctions on Iran, the Indian company’s biggest market.
The company will be able to cut its cost of debt by as much as 2.5 percentage points as the easing of sanctions allows Aban to borrow from European and U.S. banks, a route previously closed, according three analysts surveyed by Bloomberg News. The driller had debt equivalent to 129.9 billion rupees ($2.1 billion) as of Sept. 30, according to data compiled by Bloomberg, eight times as much its market value.
The relaxation of some restrictions on Iran by the U.S. and five other world powers will let companies with operations in the Islamic Republic get loans and insure their assets. Aban, which earns about 40 percent of its revenue from rigs leased to Iranian drillers, can now also renew contracts and improve operating margins that fell to a six-year low in the 12 months ended March 2013.
“Aban now has the door open to access liberal interest rates and take cheaper debt for refinancing,” Kenin Jain, head of equity sales at Emkay Global Financial Services Ltd., said by phone from Mumbai on Nov. 27. “This is a huge respite. It will boost earnings and improve cash flows. The stock is already reacting to this.” Emkay has an “accumulate” rating on the stock.
The average dollar-denominated borrowing cost for Indian companies was 5.72 percent on Nov. 27, compared with five-year rupee funding costs of 9.78 percent, according to JPMorgan & Chase Co. indexes and data compiled by Bloomberg.
Aban, based in the south Indian city of Chennai, has $398 million of debt due for repayment through 2015, according to data compiled by Bloomberg. Its weighted average cost of debt is 7.1 percent and that for debt and equity is 7.9 percent, according to data compiled by Bloomberg.
Its short-term debt is rated A4, the second-lowest grade, by Mumbai-based Credit Analysis & Research Ltd. Standard & Poor’s and Moody’s Investors Service doesn’t rate the company.
Aban has surged 26 percent this week, making it the second-best performer in the S&P BSE 500 Index. The shares rose as much as 4.1 percent to 385.45 rupees and traded at 379 rupees as of 11:32 a.m. in Mumbai. This year, Aban has gained 0.2 percent, compared with a 7 percent gain in the S&P BSE Sensex.
Eight of Aban’s 18 rigs and drillships are operating in the Gulf, including four in Iranian waters, according to Rigzone.com, which collects data on rig locations. Five rigs are in South Asia, two each in Mexico and Southeast Asia and one in Brazil, according to the company’s website.
Aban probably would have struggled to renew contracts for some of the rigs operating off of Iran next year without the easing of sanctions, Jain said. The renewals will help the driller maintain cash flows and revenue, he said.
At least three rigs are in the Middle East region, Aban says on its website, without specifying where. It also doesn’t give locations for eight of the rigs.
C.P. Gopalkrishnan, deputy managing director of Aban, declined to comment on the company’s debt, rigs and the impact of the U.S.-Iran deal at his office on Nov. 26.
“The risk factor for Iran has reduced significantly with the Iran-U.S. deal as revenue over the next couple of years is now ensured,” said Mayur Matani, a Mumbai-based analyst with ICICIdirect.com, who has a “hold” rating on the stock. “The company’s valuation would rise and there are possibly more gains for the stock in the near term.”
Aban’s price-to-earnings ratio, a measure of its valuation, increased to 6.59 on Nov. 28 from 5.34 on Nov. 22, the last trading day before the Iran announcement. Local rival Dolphin Offshore Enterprises India Ltd. has a price-to-earnings ratio of 3.31 while Jindal Drilling & Industries Ltd. has 6.32.
Aban and its units earned 19 percent of its revenue from India in the year ended March 31 and 67 percent from the rest of Asia, according to data compiled by Bloomberg. Net income in the year dropped 40 percent to 1.9 billion rupees compared with a year earlier. It may rise 74 percent to 3.3 billion rupees this year, according to the median estimate of nine analysts compiled by Bloomberg.
Iran and six world powers, including the U.S. and its European Union partners, struck a deal on Nov. 24 in Geneva that will relax restrictions on cars, petrochemicals, aviation parts, gold, and insurance for oil cargoes for Iran. In addition, it will let the Islamic Republic continue exporting oil at current levels instead of forcing further reductions. Some primary sanctions on oil and banking remain.
The nations also set a six-month timetable to reach a more comprehensive accord to rein in Iran’s nuclear program.
In exchange for a selective easing of sanctions, the agreement requires Iran to curtail sensitive nuclear activities, reduce its stockpile of enriched uranium and agree to increased international inspections of its nuclear facilities.
“Iran has come at a great time for Aban, and there’s now an environment that’s going to be beneficial for them,” Deven Choksey, managing director of Mumbai-based K.R. Choksey Shares & Securities Pvt., said yesterday. “There’s likely to be heightened exploration activity in Iran, and this is going to ease some of the pressures on the company’s balance sheet.”