Aban - a Titanic dilemma?

Lets understand the repurcussions of sinking of Aban Pearl, Aban Offshore's drillship that has sunk in Venezuelan waters.

This drillship was contracted till January 2015 and was earning $358,000 per day.

Markets are presently assuming that the present contract is lost due to this accident. This can impact EPS by 30%.

Loss of the sunken drillship ($235 million) is likely to be recovered from insurance. This is a big relief and good news.

The loss of the revenue / cash flow is the main issue.

There is a strong possibility that Aban will not let this happen by resuming the contract with one of its two idle drillships - Aban Abraham and Deep Venture. This, however, is presently a speculation only.

If this happens, expect a strong rebound of the stock.

The stock presently entering gamblers' and punters' dream territory.

Either this will make you decent quick money or sink you too.

Chances of sinking are less.

There are bigger players whose investment is at stakes.

Still, risk is risk. Take your own decision.

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Aban Pearl was insured for $240 million (hull policy) and the premium was around $10 million.

Aban had also taken a $100-million protection and indemnity insurance cover to meet any claims related to debris removal.

The hull policy covers physical damage to the rig whereas the protection and indemnity cover takes care of the liabilities.

Though Aban Pearl was insured for $240 million, the insurers are expected to pay the replacement cost since the drilling ship was insured for ‘market value'.

However, sadly, the rig was not insured for ‘loss of profit' due to business interruption.

Aban's officials are not revealing the name of the insurer but it is most likely ICICI Lombard along with United India Insurance and New India with stakes of 75%, 15% and 10% respectively.

However, the insurers would be spared heavy claims as they had placed 90 per cent of the risk with reinsurers, with these companies being content with only the reinsurance commission.

However, now the insurance costs for Indian energy companies are likely to rise after this accident. Fortunately, ONGC concluded its insurance programme at a lower price before these incidents.

The sinking of Aban Pearl happened when insurers worldwide were knee deep with the oil spill in the Gulf of Mexico caused by an explosion in BP’s oil rig off the US Gulf Coast.

Also, the sinking of the rig will put pressure on prices.

Media report suggests that attempts are being made to refloat the rig. In case that happens, the damage will be reduced.

Fortunately, the rig was manned with 95 workers and all of them were evacuated safely.