Sharekhan maintains buy on Shiwani Oil

MUMBAI: Brokerage Sharekhan has maintained a ‘Buy’ rating on the Shivvani Oil & Exploration Company and expect the stock to hit a target price of Rs 370 per share. “At the current market price of Rs101, the stock discounts at 2.2x its FY2010E earnings and is quoting at an enterprise value/earnings before interest, depreciation, tax and amortisation of 3.3x. We maintain our Buy recommendation on Shiv-Vani with a price target of Rs 370,” said Sharekhan report. The Sharekhan analysis took into account reports of delay by Shivvani Oil & Exploration in supply of deep driller rigs to ONGC and has left out the possible penalty of 5 per cent from its earnings estimates. “Shiv-Vani Oil and Gas Explorations (Shiv-Vani) had earlier bagged an order worth Rs1,610 crore from ONGC for charter hire of eight onshore deep driller rigs for the latter’s Tripura, Sivasagar and Rajahmundry assets for a period of three years. As per our interaction with the management of Shiv-Vani, out of the eight rigs contracted, only three have been delivered as yet, two are in advanced stages of mobilization while there has been a delay in another three rigs for which the company is seeking extension. As per the contract, ONGC can take punitive measures against Shiv-Vani for its failure to fulfill the contractual obligations. It can impose a 5% penalty on Shiv- Vani in case of failure in delivering the rigs on time. The management of Shiv-Vani believes that such kinds of delays are normal in such huge contracts, considering the various logistic and technical issues involved. The management is quite confident of resolving this issue amicably in view of its long standing relationship with ONGC for over 15 years and believes that ONGC would agree to the extensions sought by the company. Considering that the average day rate of the ONGC contract is about $25,000, the annual revenue from one rig works out to about Rs43 crore. Taking into account a 5% penalty, the total penalty on the delayed three rigs could work out to about Rs 6.5 crore. Consequently, it could potentially affect our earnings estimates by 2.3% to Rs 44.8. However, we are not taking this into account in our estimates on account of a lack of clarity on ONGC’s final decision. Shiv-Vani has debt of about Rs1,400 crore in its books currently and the same is payable in about six years. Delays or deferment in contracts, any renegotiation of contracts or fall in the operating profit margins going forward could potentially hamper its cash flows and remain risks,” the report concludes.