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Aban Offshore (Aban)
Energy
No change in operating conditions to justify recent underperformance. We
would advise investors to capitalize on the recent correction in Aban’s stock price as we
see the risk-reward balance favorable at the current juncture. We highlight that there
has been no change in the business conditions to justify the underperformance over the
past three months. We have upgraded Aban Offshore to BUY given 23% upside to our
revised DCF-based target price of `915. Key risks stem from debt-repayment capability.
Recent sharp correction offers an opportunity to invest
We believe the recent underperformance (12% in past three months) offers a good opportunity to
invest in the stock; Aban stock has corrected by 12% in the past three months versus BSE-Sensex’s
rise of 0.4% in the same period. We are surprised by the sharp correction in the stock price
despite no change in operating conditions. On the contrary, we see the recent surge in crude
prices as positive for global E&P spending. This should augur well for Aban as some of its contracts
are due for renewal in early CY2011E and may command a higher dayrate versus our expectation.
Valuations compelling; upgrade to BUY on potential 23% upside
We upgrade our rating on Aban Offshore to BUY from ADD given a potential upside of 23% to
our revised DCF-based target price of `915. We note that the stock is currently trading at 7X
FY2011E EBITDA and 6.4X FY2012E EBITDA. On P/E basis, the stock is trading at 7X FY2011E EPS
and 6X FY2012E EPS. Key downside risks stem from debt-repayment capability. We highlight that
Aban’s net debt/EBITDA ratio stands at 5.6X and 4.9X in FY2011E and FY2012E and EBITDA to
interest coverage ratio is at 2.2X and 2.3X in FY2011E and FY2012E.
Recent spurt in crude prices augurs well for the offshore drilling services industry
We see the recent sharp increase in crude oil prices as a positive for the offshore drilling services
industry as it will encourage higher investments into the E&P sector, which in turn will improve the
demand-supply balance for the rigs. We expect crude prices to soften from the current high levels,
but expect them to remain in a healthy range of US$85-90/bbl in the near term. We note that
contracts for four jackup rigs of Aban are due for renewal in 1HCY11E. We currently assume the
jackups will be deployed at ~15% lower dayrates versus their existing contracts. We do not rule
out upside from higher-than-expected dayrates under the new contracts.
Earnings revision
We have revised our earnings estimates for FY2011-13E to `105, `124 and `135 from `129, `131
and `141 to reflect (1) delay in commencement on new contracts and (2) change in exchange rate
assumption to `45.5/US$ for FY2012E and `44/US$ for FY2013E versus `44.5/US$ and `44.5/US$.
Update on new contracts
We note there have been delays in the start-up of the new contracts.
` Aban II is likely to start its 150-day contract with Cairn India in a week’s time versus
earlier expectation of end-November 2010.
` Deep Driller I has started its new contract with GSPC in end-November 2010 versus earlier
expectation of mid-October
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