Debt pay down has been an interesting theme and the market is usually slow to recognize such companies. Companies that provide important services to the sector but the nature of the sector is such that taking debt becomes inevitable and is part and parcel of doing business are all nice investment candidates. Adding to the financial leverage if there is low capacity utilization which is low because of tepid demand can be a good kicker once demand comes back. One such sector is offshore drilling which has been in the doldrums because of low oil prices and over supply of rigs. Offshore drilling contractors have to take on debt to buy jackups and floaters to service oil companies. Average production cost for a barrel of oil is about 40 $ and recently we have seen oil sustaining above that level leading to an increase in drilling activities which were earlier muted. Globally , there is a race for drilling as many oil wells as possible. In countries like Brazil, the government has recently given massive tax subsidies to foreign oil companies for oil exploration. Trump also signed an executive order expanding offshore activities soon after he assumed office. India has also seen record drilling happen with ONGC drilling the highest number in its history.
Aban offshore is an interesting candidate in this regard. It’s indias largest drilling contractor with a fleet size of 18 rigs. It’s capacity utilization is about 50% and its paying down its substantial debt load. Given the steep downcycle it has remained ebitda positive and also is generating reasonable cash flows. Some listed seismic study companies in India have also shown a sharp uptick in orders from oil companies and are venturing into offshore studies indicating demand coming back.
The risks are very high debt, defaults in payments, possibility of it going bellyup remains, commodity type business with short contracts and of course the oversupply in the oil rig market.
Attached is the Ensco presentation ( one of the top drillers globally ) which gives a good overview of the going ons in the industry. In this presentation on page 17 - Aban ( Company 1 ) is mentioned as one of the companies with most new contracts awarded YTD 2017 along with Maersk Drilling.
Disc - invested and views may be biased.