Swift expansion while the oil prices were surging has saddled India's largest oil drilling firm, Aban offshore [Get Quote], with a huge debt during the downturn.

The Chennai-based firm has a Rs 13,000 crore (Rs 130 billion) debt on its books and a market cap of only Rs 1,645 crore (Rs 16.45 billion), down 90 per cent from its peak on May 23 last year. The huge debt is a result of the company, earlier known as Aban Lloyd, buying a 33.7 per cent stake in Sinvest ASA, a Norwegian drilling company, for Rs 5,200 crore (Rs 52 billion at the then exchange rate of Rs 40 to a dollar).

The acquisition gave Aban access to eight premium jack-up rigs with contracts, but it also increased its debt substantially.

"The timing of the acquisition has backfired as they are caught at the wrong end of the cycle," said Saeed Jaffery, analyst with Mumbai-based brokerage Ambit Capital. Aban did not respond to a detailed e-mail.

Aban, which began as a comparatively small firm that built pipelines for oil refineries and fertiliser plants, grew to its present size with a series of expansion plans.

The company was begun by late M A Abraham, a former engineer with Saipem, the oil services group. Besides the businesses mentioned, he had also latched on to offshore drilling services, catering to state-owned Oil and Natural Gas Commission. His son, Reji Abraham, 42, the present chief, was listed number 605 on the Forbes' billionaire list in 2008.

Reji had acquired the Norwegian company to cash in on the rising crude oil prices. High debt is not a problem in this business as long as there are enough service contracts to recover the money, say analysts.

The company has contracts of about Rs 14,000 crore (Rs 140 billion). But these may be affected as the prices of crude oil have crashed to near $35 levels. The price for the benchmark Brent crude fell from an all-time high of $145.66 a barrel on July 3 last year to $40 now.

This softening of oil prices have made exploration at high costs unviable, with the result that the company failed to secure contracts for four of its 21 drilling assets (20 rigs and one floating production unit).

Ajit Motwani, an analyst with Mumbai-based brokerage Emkay Share, said the repayment of debt could be an issue if more rigs (two of the 20 are hired and the rest Aban's own) are unable to get contracts. That is possible, with contracts for five more rigs getting over in the next six months.

According to industry estimates, exploration and production are likely to decline globally by 12 per cent, to $400 billion in 2009 from $454 billion in 2008. This would lead to lower day rates for jack-up rigs (16 of Aban's 20 are of this type), as oil producers renegotiate the rate with service providers.

J M Financial, a Mumbai-based brokerage, has estimated an addition of over 100 new offshore drilling assets across the world over the next three years, with day rates expected to decline by 50-60 per cent. Jack up rigs are currently earning average daily rates of $1,50,000-1,60,000.