STOCK IDEAS- Great Offshore Limited

Great Offshore Limited

BSE Code: 532786

NSE Code: GTOFFSHORE

With rising demand and volatile prices of oil & gas, there has been increased investment in exploration and production (E&P) space globally leading to strong demand for oil rigs and allied offshore support vessels. Great Offshore Limited (GOL) which offers drilling and oil field services for offshore E&P activities to the upstream oil and gas producers globally, is well set to benefit from this favorable industry scenario.

Business:

Having commenced its operation in 1983 as an offshore division of Great Eastern Shipping Co. Ltd., GOL today is India's largest integrated offshore oilfield services provider with a fleet size of 41 vessels. GOL through its diversified asset base (2 drilling rigs, 27 offshore support vessels, a marine construction barge and 11 harbour tugs)offers a broad spectrum of services to oil and gas producers globally.

GOL has expanded into other regions and service markets in the North Sea, Middle East, Russia West Africa and South Africa apart from India. GOL’s business can be classified into four major business areas:

Offshore Drilling Services: GOL offers charter hire of its drilling solutions through its 2 offshore drilling units - Kedarnath (300ft jack up rig) and Badrinath (drilling barge). These two rigs are currently contracted to ONGC on long term charter.

Offshore Logistics Support Services : GOL provides support services to offshore locations servicing rigs and platforms and has 27 dedicated vessels for this purpose – 7 platform supply vessels (PSV), 2 fire fighting support vessels (FFSV), 1 offshore supply vessel (OSV), 13 anchor handling tug supply vessels (AHTSV), 1 multi role vessel (MSV) and 3 anchor handling tugs (AHT). GOL undertakes production and diving support, towing, mooring, rig moving, anchor handling as well as supplying materials and fire fighting services. GOL has 14 vessels capable of deep water operations with 7 of them operating in international waters on various term and spot charters.

Marine Construction Projects and Services: GOL owns and operates the construction barge Gal Constructor with a complementing anchor handling tug, designed to provide a complete package service including installation, maintenance and repairs to the offshore construction industry. GOL also undertakes lump sum turnkey EPC contracts for offshore oil & gas industry. It recently bagged Rs. 234 crore turnkey contract from ONGC to be executed by mid 2010. This contract represents an important milestone in GOL’s attempt to grow its engineering services and projects earnings to augment its offshore logistics and drilling services earnings.

Port and Terminal Support Services: GOL has fleet of 11 harbour tugs which are deployed across various major ports in India. They provide round the clock service at ports for berthing, towing, emergency fire fighting and other harbour operations.

In order to strengthen its presence in port management services, GOL last week has signed definitive agreements for acquisition of 100% equity stake in two companies , KEI-RSOS Maritime Ltd. (KEI) and Rajamahendri Shipping & Oilfield Services Ltd. (RSOS) for an aggregate consideration of around Rs 160 crores and transaction is expected to close within 2 months. These two companies having fleet of 19 diverse vessels (9 offshore support vessels and 10 harbour tugs) are in the maritime services business providing offshore support, single point mooring operations and port management services and have strong presence on East Coast of India. This acquisition would add around Rs. 100 crore to GOL’s annual FY09 revenues with PAT margin of around 30%. "The decision to acquire an existing running business is with a view to broad base earnings without diversifying core business risks and ensuring sustainable cash flows and earnings." said Mr. Vijay K Sheth, Vice Chairman cum M.D.of GOL in its press release.

GOL has good relationships with oil & gas companies globally. Its client base includes ONGC, Hardy Exploration, Cairn Energy, Shell, Gujarat State Petroleum Corp., Hindustan Oil Exploration Co. Ltd, Reliance Industries among others.

Investment rationale:

Soaring crude oil prices coupled with widening demand supply gap due to lack of addition to global reserves has led to sudden increased offshore E&P investments globally. This in turn has led to strong demand for rigs and offshore support vessels. However with most of shipyards already booked for 2-3 years and uncertainty in timely delivery, availability of newer vessels remain tight. These have caused day rates being almost doubled over last few years and are likely to remain firm along with higher utlisation rates. This would benefit GOL which has a large fleet. Some of GOL’s existing supply vessels are due for re-pricing which are expected to fetch significantly higher day rates.

GOL currently has 2 new builds (one 350 feet jack up, and one MSV Malaviya 32) under construction at Bharti Shipyard to be delivered by end FY09. These two have already been contracted for day rates of Rs. 0.64Cr / day and Rs. 0.4 Cr /day respectively and would start contributing significantly to revenues from FY10 onwards.

Further GOL revenues from other verticals like marine construction and port management services would significantly augment its revenues. GOL with its diversified offerings in E&P space has good earnings visibility. Further GOL has adequate cash flows and unleveraged balance sheet providing assurance to investors.

Concerns:

Any steep fall in crude prices leading to E&P slowdown, delay in capex plans of exploration companies and currency fluctuations could affect the margins. GOL is also subject to economic downturns like higher inflation leading to less trade, higher maintenance & repair costs, and increased staff costs thereby affecting the operating margins. However GOL being in diversified vertical businesses is shielded from downturn in any particular vertical.

Valuations:

GOL looks set for steady growth on the back of robust macro environment, buoyant demand for offshore rigs, addition of new assets to its operations and increasing presence in marine construction and port & terminal administration services. GOL’s margins are likely to increase due to repricing of some old contracts and inclusion of deepwater assets leading to higher day rates. GOL’s revenues are expected to grow at CAGR of 34% over FY08E-FY10E and net profit at CAGR of 37% between FY08-FY10E. At CMP of Rs 534.95 it trades at a P/E of 7.94x & 5.52x its FY09E & FY10E earnings respectively. Considering the strong revenue growth with diversified revenue streams, GOL can be looked at current levels from medium to long term perspective.

	Standalone	Consolidated Annual
in Rs. Crore	Q1 FY09	FY08	FY09(E)	FY10(E)
Net sales	202.68	745.90	957.00	1340.00
OP	84.27	312.44	401.94	582.90
PAT	35.65	201.63	263.18	378.55
Capital	37.66	38.12	39.07	39.07
EPS (Rs.)	9.36	52.90	67.36	96.89

Price	534.95	Date	5/9/2008
PE	10.11	PB	2.76
Book value per share	194.12	EV	2940.67
EV/EBIDTA	7.62	Mcap	2014.70

Share holding	Jun 2008
Promoter owned	20.3
Public owned	36.81
FIIs owned	12.96
Others owned	29.93