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Crude price rebound fails to boost rig rentals, rues Aban MD

Rebound in crude price has categorically not reflected in bounce back of rig rentals in FY2016-17, lamented Mr Reji Abraham, Managing Director, Aban Offshore Ltd in the annual report 2016-2017 released on 13th Sept. “one big development during the year under review was a substantial rebound of the international crude oil price from a low of around US$28 per barrel to the prevalent US$50 per barrel. However, I must immediately indicate that this substantial recovery was not mirrored in an improvement in rig rentals.

The only improvement that was visible was that a few customers did announce capital expenditure programmes, which translated into some contracts marked by shorter tenures. Case in point: contract tenures declined from an average of around eight quarters earlier to around a single quarter on a number of occasions, indicating the extreme caution with which oil exploration and production companies selected to proceed in this environment”, he said.

The biggest profitability driver of rig service providers is the price of crude oil. The higher the oil price, the better the viability of oil exploration and processing companies, the greater their reinvestment into drilling and the greater their need to lease drilling rigs from service providers like us, he opined.   

Aban marketing strategy in rig deployment

At Aban Offshore possess modern rigs for deployment, translating into a total annual availability of 216 rig months. At a time when rig rentals remained weak (declining to as low as US$50,000 a day), the principal objective of the Company was to maximise rig deployment with the objective to minimise overheads. The result is that our marketing team reached a wider customer spread; the Company relocated Aban Abraham from Brazilian to Indian waters (deployed by ONGC), making it the sole Indian owned drillship working here.

Similarly, the Company won a new contract for Aban Ice with ONGC for three years, enhancing revenue visibility. Aban’s marketing team continued to work closely with a range of customers, understanding their needs and responding with speed to emerging opportunities. The result was that the Company engaged three new customers during the year under review, showcasing the fact that Aban’s price-value proposition continues to be attractive. At Aban Offshore, the enterprise also focused on reducing overheads by Rs. 598.30 crore during the year, with a view to bring down our breakeven point.


Debt mgmt high on agenda

Managing debts was one of the biggest challenges that Aban faced as of 31 March 2017. The company possessed Rs.14, 005 crore of debt on our books, corresponding to a debt-equity ratio of 5.31:1. During favourable years, the company selected to expand by taking on debt. “While this appears high, we would need to bring to the attention of our shareholders that the average debt cost of 7.60% should in normal circumstances have translated into a good interest cover. However, with rig rentals declining, it became difficult to cover interest costs. The principal objective of the Company is to work closely with bankers to moderate debt cost on the one hand and extend debt repayment tenures on the other. The Company repaid Rs. 224 crore of high-cost bonds during 2016-17. We expect that this will have a reasonable impact on our interest outflow, going ahead”, he said.  

Global Oil industry outlook

The outlook for the global oil industry continues to be fluid. The two big variables influencing global oil prices comprise the OPEC’s stance on whether it would moderate oil output and geopolitical tensions that could cause oil prices to rise. “Our expectation is that oil prices are likely to consolidate around the prevailing levels. On the other hand, a number of active rigs have gone out of business and are unlikely to come back into play. The result is that when demand revives, we foresee that rig demand may improve the rates on account of these factors.

The Aban agenda is to market aggressively, extend our presence across more customers and waters, maximise rig deployment, cover overheads effectively, repay or re-price debt and moderate overheads. The Company’s rigs are known for their service-readiness and ability to respond to customer needs anywhere in the world. This makes it possible for Aban to deploy rigs at a short notice and enhance overall capacity utilisation. This is the guarded optimism that I must share with you. We believe that our persistence will eventually prevail and the company is attractively positioned for any sectoral rebound in a quick and reliable manner”, Chairman said.

Indian offshore rig mkt

The offshore India rig market was one of the more active in the international arena, and has the potential for additional jack-up and floater contracts during the coming year. Acreage availability was fairly good, with an offshore round for Discovered Small Fields completed last February that included shallow and deepwater blocks. The lack of demand for drilling and exploration activities led to a gradual, yet sharp, drop in the demand for rigs across the globe. This was evident in the decline in the global oil and gas rig count in the first half of 2016. The rig count, which stood at close to 1,900 units in January 2016, fell to roughly 1,400 units in May 2016, representing a plunge of more than 25% in just five months. ONGC mapped a further 130 deepwater plays. Rig demand stabilised going into 2017 with the number of contracted floaters and jack-ups remaining flat since the start of the year.

Most rates were believed to be around or below operational expenditures for short-term jobs, excluding any performance-based component. Average mid-water floater day rates decreased sharply, along with all the other market categories of the rig fleet. In 2013, mid-water floaters enjoyed a day-rate range spanning the upper US$200,000 up to US$400,000, but since then declined to a current low of US$100,000 to US$150,000. Recent fixtures in the North Sea were around US$ 120,000, while in Asia Pacific, units were offered at US$ 120,000 or lower. These day rates are expected to remain stable till 2019, quoting IHS, Mr Abraham observed.


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