Wednesday, 11 November 2015

Aban Offshore - Equity Dilution

Aban Offshore is an offshore driller that provides the following services: Exploratory services, Drilling services, Production of hydrocarbons, Manning and management.

Also into Wind Energy and produces 70MW annually.

Clients: Oil & Natural Gas Corporation Ltd. (ONGC),Hardy Exploration & Production (India) Inc., Shell Brunei, Shell Malaysia, Gujarat State Petroleum Corporation Ltd. (GSPC), Hindustan Oil Exploration Co. Ltd., Cairn Energy, Petronas Carigali, ROC Oil, Shell (South East Asia), Exxon Mobil Malaysia.

Aban Offshore's share price fell from 5500 (2008) to 209(2015). This post explores this price collapse and hypothesises about the causes of this steep fall.





§ Has Aban Offshore crashed because of falling International Crude? §

NOPE.

The following graphic superimposes $BRENT (Brent Crude Oil) on Aban Offshore's price (Golden coloured curve) 2006-2015, and the smaller chart attached below it is the mathematical correlation between the two.

And we can see that there is no reliable correlation between the two price trends.




§ Has Aban Offshore price crashed because of company financials? §

NO........

A quick look at the company financials suggests all is well, and in fact improving:

1)  The operating profit margin is excellent.
2)  The Net Profit Margin is the highest in 5 years.
3) ROCE and RONW look good, and stable.
4) Current Ratio and Quick ratio both have improved.
5) ALL the debt ratios have reduced steadily over the last 5 years. Debt has halved.
6) Interest Cover Ratio stands at 1.67 (more than 1.5 is ok). And has improved, in fact.



So what's going on here? Why has the equity price gone from INR 5500 (2008) to INR 211 (2015) although the financials are quite ok?

The following graphic is the Capital Structure table of Aban Offshore.



 In FY 2014-15 Aban Offshore diluted its equity from 43,510,000 shares to  57,750,000 shares, which is a dilution of 32.8%.


From 2007-8 to 2014-15, Aban has diluted its equity from 37,797,360 to 57,750,000 shares. This is a dilution of 52.8%.

Hypothesis: 

As the company created more and more shares, supply of shares exceeded demand, and that put heavy downward pressure on the share price.

Of course, many factors would have contributed to Aban's share price collapse, including the effect of broad market movements and price inertia.

We do see, however, in the Valuation Ratios table, that Aban has maintained a good Operating Profit per share.

Furthermore, Aban's EPS (standalone) was 40.65, and EPS(consolidated) was 90.4, on 13th November, 2015.

So all is not lost, in fact all is well, and Aban's share price could rise in the near future, in a sustainable trend, unless they dilute their equity again, which is possible. Not a very reliable share.



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