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• Despite the slowdown in the global economy, firm crude prices are driving investments in the upstream industry. The new year has given a fresh lease of life for the Great Eastern Shipping Co (GE Shipping) stock. So far this year, the stock is up 39%, more than double the 18% gain registered by the Sensex. While low valuations played their role, what turned the tide in favor of GE Shipping is the resilient offshore business.Despite the slowdown in the global economy, firm crude prices are driving investments in the upstream industry. According to Amit Agarwal, analyst at Kotak Securities, the world over, the upstream industry is estimated to spend 15% more in exploration & production (E&P) activities in 2012.
• Agarwal wrote in a note “If oil even sustains at these levels (most likely), it would encourage oil E&P companies to further invest in exploration which would give a thrust to oil exploration, thereby improving the fortunes of offshore asset owners with better rates and better utilization.”GE Shipping said in a statement “With oil close to $100 per barrel, E&P activity worldwide has picked up significantly. The E&P budgets are expected to grow by 10-12% in 2012 taking spending back to near all-time high.”
• A sustained pace of investments in E&P activities will increase business opportunities for offshore business service providers like GE Shipping. Even though the company currently derives majority of its revenues from the shipping business, it is fast ramping up its offshore business. Between the current and next year, by investing $261 million, the company is aiming to add four new assets (remotely operated vehicles/jack-up rigs).
• The new assets would give a fillip to the offshore business and boost revenues of the company. From 32% in third quarter last fiscal, contribution of the offshore business to overall revenues has risen to 40% in the just ended December quarter. The offshore business is already growing at a faster pace - up 60.8% against 12.7% growth registered by the shipping business in the third quarter. With new assets, the share of offshore business in the overall revenues is expected to rise further.
• Chetan Kapoor of IDBI Capital said in a note “In offshore, we expect a relatively attractive scenario to continue until the crude oil remains in the post $80/barrel territory. The demand environment is expected to be better in certain asset classes. The jack-up rig order-book is relatively modest at 15% of existing fleet and as differential between older and newer asset classes has significantly increased the jack-up outlook is expected to be relatively strong.”Overall, even though the shipping business is weighed down by oversupply of vessels and falling freight rates, continuation of robust investments in E&P activities are improving business outlook for the GE Shipping.

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