The global shipping market may have shown some sparks of recovery, especially in the tanker segment, in the last few weeks. And ship owners could have drawn some cold comfort from this, hoping that the trend signalled the beginning of an easing of tough times the freight markets have been going through. But the hard truth is that the woes of shipping companies are far from over, as the freight market is expected to be largely damp for most part of the year.

Perhaps this has prompted Essar Shipping, part of the Ruias-controlled Essar Group, to sharpen its focus on its drilling and logistics business to offset the margin pressures that shipping operations will continue to face.

Mr A. R. Ramakrishnan, Essar Shipping's Managing Director, speaks to Business Line on the company's plans in the drilling business and initiatives to reduce debt on its books.

There has been some uptick in the tanker rates. How do you see the freight market in the coming months?

Yes there have been some improvements in tanker rates. I feel this could be an upshot of refineries stocking up crude due to uncertainties in supplies from Iran. Also, some private refineries in India are going in for Latin American crude, as these can crack dirtier crude. These long-haul shipments could keep the rates going.

For instance, while shipping crude from West Asia to India could take three to four days, hauling it from Latin American would take between 30 and 40 days. We are seeing more fixtures on the global charts that could keep charter rates stable. But, then, in a business like shipping you can never tell.

Is this why you are sharpening focus on your drilling and logistics business?

To some extent yes, although our entire fleet is under long-term contracts that yield stable earnings and better margins than spot operations. But yes we are sharpening focus on our other two businesses-drilling and logistics. Today, these two businesses contribute 20 per cent and 40 per cent to Essar Shipping's revenues respectively.

What would be the revenues from these two businesses?

We are yet to announce 2011-12 results yet. But in the previous year (2010-11) it was about Rs 1,286 crore in the logistics sector and Rs 353 crore in drilling. In the fiscal, we expect to generate more revenues from these sectors, especially given the fact that the off-shore semisubmersible rig, Essar Wildcat, is deployed in Indonesia on a contract with ConocoPhilip at around $ 285,000 a day, which is amongst the highest in the region.

How is the global drilling market doing?

We have a positive outlook on this. With crude rates being steady at $110 plus a barrel, there is increase in demand for oil exploration both offshore and onshore. Generally, when crude prices breach the $70 a barrel mark, there is a push in exploration and production (E&P) operations. We are seeing this in geographies such as Far East, Brazil and Africa. We expect E&P expenditure to go up going forward.

How has been the movement in day rates for rigs for the last one year?

A. A year ago, jack-up rigs fetched some $ 75,000-80,000 a day. Today a modern rig could bring you $140,000-150,000 a day. In the mid-water segment (at depths between 400-500 m), the rate increased from $200,000 to between $260,000 and $280,000 a day during this period. Clearly, the demand is moving up.

At what rates have you booked your rigs?

Our Wild Cat rig, which is in the mid-water segment, is on contract in Indonesia at $285,000 a day, which will continue for another 12 months. We see opportunities for the contract to go beyond that also.

We recently booked our land rig for a contract in Brunei for the first time for $35,000-a-day, which will fetch us a revenue of $ 25 million over 15 months together with the contract for another rig in India. What is important is that we have established our presence in markets where E&P demand is rising.

What kind of margins you expect from these rigs?

It would be 70 per cent plus in terms of EBIDTA for the semisubmersible rig and about 55-60 per cent for the other rigs. Some of our other rigs have gone for refurbishment, which we will deploy in those geographies later this year.

How are you planning to reduce debts on your books?

We have a debt of Rs 5,700 crore, which we intend to reduce this fiscal. There are two ways we are planning on debt burden – reduce actual debt and reduce the rate of interest. We are considering options to pay back some portion of this through our internal accruals and convert some rupee debt into dollar debt, apart from re-financing another portion of our dollar debt. We will be taking a final call on the amount of debt reduction and timing soon.

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