Aban Offshore- Drilling itself out of a hole: Macquarie

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Aban Offshore
Drilling itself out of a hole

Event
 Aban Offshore announced a consolidated recurring PBT of Rs1.95bn (up 9%
QoQ, 96% YoY) broadly in line with expectations; however losses in its JV
dragged down its bottom line to Rs752m. We expect rig-rates to firm-up (see Fig
7), given highest-ever rig-count in the Asia-Pacific region fuelling competition, and
India currently deploying the highest number of rigs ex-US/ Canada. We believe
ABAN should catch up with closest peer China Oilfield Services (2883 HK,
HKD14.5, Neutral, TP: HKD15.0), which jumped 64% in 5 months. We upgrade to
Outperform from Neutral, with a 6% increase in TP to Rs970.

Impact
 Top line of Rs8.3bn (up 18% YoY, down 2% QoQ) in line with estimates:
ABAN’s revenues were almost flat QoQ; the mild decline attributable to Aban
VII being operational for the initial part of Q1FY11. However, reduced Other
expenses due to lesser mobilization costs improved EBITDA by 7% QoQ.
 Deep Venture uncontracted yet, Aban Abraham to operate from end-Jan:
Both ABAN’s high-earning drillships (which earn dayrates of US$350-450k
usually) are currently idle. While Aban Abraham has visibility of earnings
through a US$270k/day, 5 year contract commencing from Jan-2011, Deep
Venture has no contracts lined up as yet. Further, 2 jack-ups (Deep Driller 1,
Aban II) were idle in Q2 (and could remain so for most of Q3FY11 as well).

Hence, we expect a modest Q3, but improvement in earnings from Q4FY11
due to Aban Abraham‘s earnings kicking-in.

 Loss from JV hurts bottom line: A loss of Rs302m due to the share in JV
earnings (vs a Rs952m profit in Q1) hurt earnings this quarter.
 Write-offs on Norwegian company (Rs139m for Q2FY11) tapering off:
The write-offs due to the bankruptcy of Petrojack ASA (a Norwegian
company, in which ABAN has invested through its subsidiary Sinvest) have
tapered down to Rs139mn. ABAN has written off Rs1.2bn in Q4FY10, and
Rs136m in Q1FY11 due to the Petrojack bankruptcy.
Earnings and target price revision
 Long-term (FY13E onwards) PAT increased by 3-6%; TP increased by 6%.
Price catalyst
 12-month price target: Rs970.00 based on a DCF methodology.
 Catalyst: Contract for drillship Deep Venture

Action and recommendation
 Slow, steady revival; playing catch-up with regional peer: We believe that
ABAN has been a laggard, having borne the impact of the loss of its semisubmarine
as well as issues with investments/forex write-downs; and is
beginning to emerge from the trough. ABAN is trading at a FY12 PER of 7.1x,
a significant discount to its peer China Oilfield, which is trading at 11.7x, and
the global average of 10.8x.