Column : Shoring up

Written by MG Arun | Updated: Jun 27 2009, 02:13am hrs
Days before ABG Shipyard, the countrys largest private yard operator, made an unsolicited bid for 32.12% in offshore services firm Great Offshore, offering a 9% premium to Bharati Shipyards earlier offer, the market was abuzz with talks of an impending bidding war. No wonder then, for nearly a month, share prices of both Great Offshore and Bharati Shipyard have been moving up on the Bombay Stock Exchange (BSE). Great Offshore, as on June 25, stands at Rs 417 levels, compared to just Rs 330 a month ago. Bharati, on the other hand, stands at Rs 167, compared to Rs 147 a month ago.

Ever since Bharati made a Rs 344 a share offer for a 20% stake in Great Offshore, after buying a little below 15% in the company from promoter Vijay Sheth in May, there has been much media attention on the offshore services business in general and both the companies in particular. With ABG making its bid at Rs 375 a share for Great Offshore, and Bharati announcing a counter offer of Rs 403 the same day, the focus on the sector has only sharpened. This, however, does not mean that the sector had so far escaped analysts attention.

One of the big positives for the offshore services business is the firming up of crude oil prices in recent months, from as low as $56 a barrel in October last year, to around $70 as of now, which is expected to revive the development of new oil supplies in extremely demanding areas. The production of offshore oil and gas has increased significantly over the last decade. According to the Energy Files Global Database, offshore oil output has increased by 22% since 2000. This, in turn, is expected to touch as much as 30 million barrels per day in 2008. As per a study by brokerage firm Prabhudas Lilladher, the offshore annual expenditure is expected to go up from $250 billion in 2007 to $350 billion by 2012, creating a huge window of opportunity for offshore services companies like Great Offshore, with diversified assets across categories like drilling assets, offshore supply vessels (OSVs), harbour tugs and offshore construction. With oil prices firming up, oil and gas companies will compete for available equipment and resources. Overall, energy demand is expected to grow by 1.7% in the period 2006-30, adding to the prospects of exploration and production (E&P) firms, and in turn, offshore services companies.

The increasing focus on deep water oil and gas exploration by E&P firms is expected to absorb a massive expansion of fleet planned by offshore services firms. Drill ships alone are expected to more than double in size from 41 to 85, a growth of 107%. The two offshore drilling units of Great Offshore, Kedarnath and Badrinath, are capable of drilling up to a depth of 20,000 feet. Kedarnath, which can operate in 300 feet of water, has drilled several exploratory wells, the deepest of which was 4,234 metres in the Mumbai High oilfields. The deepest well drilled by Badrinath, which can operate in 600 feet of water, was 4,991 metres.

Similarly, the demand for OSVs has also been strong over the years, indicating the prospects in this business. Typically, a rig or production platform would require 2.5 to 4.3 OSVs. Since the demand for OSVs is dependent on the demand for rigs, and with 171 rigs expected to enter the market, this part of the business will remain robust. The implementation of the National Exploration Licensing Policy (NELP) and the subsequent increase in investments in the domestic hydrocarbon sector is also driving the offshore services business.

With a diverse fleet of offshore assets and 80% of its assets on time charter and the remaining on spot, Great Offshore has strong revenue visibility, according to analysts. As much as 75% of Bharati Shipyards vessels are used for the offshore service business, and it derives 15% or Rs 300 crore to Rs 350 crore of its total order from Great Offshore. This makes it naturally aspire for a controlling stake in Great Offshore. ABG also sees a great need to put its best foot forward in the race, and both the bidders are expected to further sweeten their bids for the Great Offshore pie. With battlelines drawn between the two companies to acquire Great Offshore, the offshore services segment will be an interesting area to watch out for in the coming months.