ABAN OFFSHORE- Loss from associates dents PAT : Edelweiss

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ABAN OFFSHORE
Loss from associates dents PAT



􀂄 Revenue in line with estimate; lower costs boost EBITDA margin
Aban Offshore’s (Aban) Q2FY11 consolidated revenue of INR 8.28 bn (our estimate
INR 8.35 bn) jumped 17.8% Y-o-Y, but dipped 1.7% Q-o-Q. Its consolidated cost of
sales rose to INR 569 mn (at 6.9% of revenues), lower than our estimate of INR
668 mn. Operating costs were also considerably lower than estimate at INR 2.15
bn, resulting in a jump in EBITDA to INR 5.56 bn (up 22.8% Y-o-Y and 6.9% Q-o-
Q). Consequently, Aban’s EBITDA margin was 550bps higher, at 67.2%, against
61.7% in Q1FY11. Interest expenses, at INR 2.4 bn, rose 5.9% Q-o-Q on working
capital borrowings for starting new contracts. Aban repaid debt of USD 150 mn this
quarter, with total debt at USD 2.9 bn towards this quarter end.




􀂄 PAT dented by loss from associates and diminution in investment
Aban wrote off INR 139.4 mn towards provision for diminution in investment in
Petrojack ASA. It also reported loss of INR 302 mn in its share in earnings of
associates due to unusual closure of the bare boat charter for Deep Venture.
Consequently, Aban reported PAT of INR 752. However, excluding the loss incurred
from associates, the company reported earnings of INR 1.05 bn, in line with our
INR 920 mn estimate. Aban’s current rig fleet comprises 19 assets and only one rig,
Deep Venture, is idle. The company has warmstacked the rig and is looking to
coldstack it, and is in the process of legal arbitration with the rig’s owners. It may
incur further losses from associates to the tune of ~INR 150 mn in each of the
next two quarters. During Q2FY11, the company announced inking of new contracts
for its drillship Aban Abraham with Petrobras (Brazil) and jack-up rig Aban II with
Cairn Energy India.


􀂄 Outlook and valuations: Waiting in the wings; maintain ‘HOLD’
Q2FY11 was operationally good, except for the distortion in PAT due to loss from
associates. Currently, 18 out of Aban’s 19 assets are contracted and we believe the
only uncertainty on the stock is the legal outcome of the Deep Venture asset.
Valuations of global offshore companies had eased post the BP spill incident, but
the rig market is gradually improving as new jack-up day rates have moved from
USD 120,000 to ~USD 150,000. We are revising down our earnings estimates for
FY11 and FY12 to adjust for lower earnings from associates. We are rolling forward
our valuations from March 2011 to March 2012 with the SOTP raised to INR 945
(based on 6.5x 1-year forward EV/EBITDA). We are presently not factoring in any
earnings from Deep Venture in FY12; an early resolution of the dispute leaves
room for further upsides. At INR 841/share, Aban is trading at 5.1x FY12E EPS. We
maintain our ‘HOLD/Sector Underperformer’ recommendation on the stock.



􀂄 Company Description
Aban is the flagship company of the Aban Group, promoted by Mr. M. A. Abraham. The
company, founded in 1986, is an offshore drilling contractor. Through a series of
aggressive acquisitions over the years, its fleet expanded to 20 rigs by FY09 end/early
FY10. Notable clients include ONGC, Hardy Exploration & Production (India), Oriental Oil
(Dubai), Shell Brunei, Shell Malaysia, Gujarat State Petroleum Corporation (GSPC). Aban
is headquartered in Chennai (India) with subsidiaries and overseas offices in Singapore,
Norway, and Cyprus. Aban’s average asset age is 17.3 years.


􀂄 Investment Theme
Industry environment has improved as crude has recovered from earlier lows and
contracts are being signed at gradual pace (though 30-40% lower dayrates).
Consequently, jack-up day rates have corrected and capacity utilization has declined in
the industry. However, the recent fixtures of Aban at significantly higher day rates have
come as a significant positive, providing revenue visibility and earnings comfort given its
high debt and leverage.'


􀂄 Key Risks
Low commodity prices and global economic weakness could impact capex budgets of E&P
companies and oilfield services demand.
Higher debt could expand interest costs. Further, any realized/unrealized losses on
derivative contracts could impact the company.
Low disclosure levels in Singapore subsidiary, given that more than 65-70% of its
revenues in FY09E are likely from this arm.
Dependence on ONGC, geo-political tensions in area of operations, vessel break down
could impact the company.