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4 stocks you can invest in NOW

Last updated on: August 20, 2007 12:21 IST

The Sensex has tanked by 1,727 points or 11 per cent per cent from its lifetime high of 15,868 touched on July 24. Will it slide further? Or, is it a good time to buy? These are questions that do not have answers even from expert analysts right now.

But what savvy investors can do is grab the opportunity to buy stocks, which have declined substantially after quoting at expensive valuations during the recent rally but still have robust fundamentals. One such sector is the offshore oil services, which is going through a boom time due to record oil prices and higher exploration and production activities globally.

And this momentum is expected to continue, as the growth prospects are phenomenal over the coming years especially in FY08, when many players' assets are due for renewal and are adding new assets.

Industry experts believe that exploration activities are not going to slow down as more and more countries want energy security. Oil services companies provide rigs and supply vessels to companies undertaking oil exploration like ONGC and Reliance Industries.

Since rigs and supply vessels are in deficit, analysts expect substantial growth in the realisations of owners of these assets, and good returns for investors in these stocks. Stocks like Aban Offshore, which were hovering at record high levels two months ago have declined by 15-20 per cent from those levels and are now trading at attractive valuations.

Increased E&P spending

A compounded 1.8 per cent growth in oil consumption in the past ten years has surpassed the reserves growth of 1.58 per cent. The voracious global need to fuel robust growth, especially in emerging countries, has led to global spare oil production capacity touching a three-decade low at two million barrels per day in 2006.

This has led to a spike in oil prices, which are currently ruling at about $72 after touching a record level of $78.77 on August 1. Thus, fearing an oil price shock experienced last in early 1970s, countries are spending billions of dollars for energy security.

International energy association estimates $3.6 trillion to be spent on oil and gas exploration till 2030. Even in India, the government's announcement of New Exploration Licensing Policy rounds has invited global players to bid for oil blocks and higher spending.

Large companies like Reliance Industries, Cairn, Chevron, ONGC and British Gas have lined up huge investments with Reliance alone having spent $5.2 billion in the Krishna-Godavari basin. This has led to huge demand for the products of oil services companies engaged in deep water rigs and supply vessels.

Rigs and supply vessels in high demand

While demand is growing at a scorching pace, supply of such products is lagging behind as low oil prices and lack of interest in fresh exploration over the past two decades led to little investment in the entire value chain of offshore assets.

This has led to phenomenal growth in the day rates (read realisations for companies) especially for all kinds of rigs, which have doubled in the last two years. Moreover, utilisation rates are close to touching full capacity.

Though players globally are now adding capacities, industry experts expect day rates to remain firm, as the new capacity build-up will take three-four years to fructify. Also, the incremental capacity is likely to be absorbed as most of the current capacity is aging and are about 20 years old.

The recent consolidation in the industry (the merger of global offshore drillers Transocean and GlobalSantaFe, both based in the US) also boosts confidence, as it will help the day rates to remain firm. Almost all the Indian players like Aban, Great Offshore and Garware Offshore have lined up capacity additions to be delivered over the next few years.

Financials to leap

The financial performance of these companies is expected to be extraordinary, especially in FY08, thanks to firm day rates and inclusion of a younger fleet age, which commands a premium due to better efficiency.

The payback period is also expected to be shorter today than in the past as companies will recover their investments faster due to higher rates. Moreover, these companies provide high earnings visibility as new contracts are fixed for about three-five years at higher day rates.

Analysts expect robust growth in these companies in the next two years. However investors need to consider factors like a downturn in the E&P activity due to low oil prices, changes in government policy, appreciating rupee and higher staff costs (employees are typically highly skilled and specialised), which could spoil the party.

However, the biggest risk–a downturn in oil prices–doesn't seem to be likely at present as industry experts and analysts don't expect oil prices to come down significantly as they are in the middle of a four-five year cycle and may only cool off for a temporary phase.

DIGGING UP THE NUMBERS
% chg (y-o-y) Net sales Operating profit Net profit P/E (x)
FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E
Aban Offshore 253.50 65.10 420.00 71.90 888.50 228.50 20.76 8.00
Great Offhsore 29.77 19.00 48.00 28.00 68.50 42.50 8.26 6.46
Garware Offshore 55.50 60.00 64.50 65.00 80.00 70.00 9.61 5.24
Seamec 39.00 10.00 80.50 1.00 86.00 -1.00 6.21 6.12
Source: Consensus Estimates

Read on to find out which are the stocks that can provide treasure by digging underground.

Aban Offshore

Aban Offshore - the largest private Indian rig operator, which will have 20 offshore assets by 2010 after it acquired Sinvest - is the biggest beneficiary of the current deficit in rigs. Even after its stock price more than doubling in the last one year, analysts are still bullish on the company for at least another two years and are expecting its stock price to touch Rs 3,400 levels in a year.

The company is expected to post high revenue growth over the next two years as five of its assets come up for renewal in FY08, which will be priced at two-three times its existing average contract rate of $43,500 and the addition of nine new assets (including Sinvest's seven assets) coming up over the next 21 months.

Further, the listing of its 100 per cent Singapore subsidiary, which had acquired Norway-based Sinvest last year, can unlock value in the future and will be the key catalyst. Besides having the highest operating margin and return on equity among its global peers, analysts believe that Aban is expected to record the strongest growth in earnings between 2007 and 2010.

Great Offshore

Great Offshore, the de-merged business of Great Eastern Shipping, is the largest Indian integrated offshore services provider and is present in the entire offshore value chain offering offshore supply vessels besides a wide range of services in drilling, support services, marine construction and port services.

The company plans to integrate further by acquiring more rigs as they command higher day rates and longer charter periods than the OSVs. Six of its 39 assets are up for renewal in FY08 at day rates, which are expected to be higher by 20 per cent over existing rates, and the company is adding three more assets.

The company's low debt-equity ratio of less than one is a supporting factor in case of any downturn in offshore industry and can also enable the company to pursue inorganic growth. Though the stock witnessed a brief rally in the recent past, it is one of the top picks in the sector.

Garware Offshore

Garware Offshore, another offshore service provider, with a fleet of six vessels is likely to more than double its fleet size to 13 over the next three years. This vessel addition marks its entry into vessels, which command higher day rates.

It will also promote Norway-based Havyard International's services such as ship-building and ship design to Indian shipbuilders, for which Garware will earn a 5 per cent commission. Last month, it incorporated a 100 per cent subsidiary in Singapore to conduct chartering of ships to E&P companies and to provide marine offshore and logistics services internationally.

Seamec

Seamec (earlier South East Asian Marine Engineering & Construction) is an exclusive player in charter hiring of multi-purpose supply vessels with a fleet of three vessels. The company is adding one more vessel by next month and is expected to earn $65,000 a day. Moreover, its existing vessels have also been renewed at a day rate of $44,000 against earlier $19,500.

The company's debt-free status and a cash surplus of over Rs 100 crore (Rs 1 billion) in FY08 can be useful to acquire more assets. However, its margins may be muted this year due to loss of revenue for about 40 days on account of maintenance of vessels, higher staff and maintenance costs.

Priya Kansara in Mumbai
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