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Aban Offshore Ltd
Improving Financial and
Operational Leverage- OW
What's Changed
Price Target Rs1,050.00 to Rs975.00
Investment conclusion: We maintain our OW rating on
Aban Offshore, as we believe the company is on track to
refinance its debt and deploy its old jack-up assets and
two semi-submersibles. Given the buoyancy in the high-
end jack-up market, we are raising our longer-term rig
rate forecasts for Aban by ~20%. However, we are
lowering our F2011-12e earnings by 17% each to factor
in: 1) delays in deployment of Aban Abraham, which we
now expect to be deployed in March with Petrobras; and
2) a one-quarter delay in old jack-up deployment. Hence,
we are reducing our price target to Rs975/share,
implying 37% upside from current levels.
Will Aban capitalize on the current high rig rates?
Five of Aban’s 300ft jack-ups come up for renewal in the
next six months, while the higher-end assets will start
coming up for renewal at end Dec-11 to Sept-12. We
expect the old assets, with 70% EBIT margins, to be
re-deployed at US$70k/day. Also, the currently idle
Deep Venture (deep water) is expected to be deployed
by June-11, once the issues with Arktik are resolved.
Will Aban be able to refinance debt? The company
has a bullet repayment of ~US$650mn due in F2012.
Given that it was able to refinance US$2bn of debt in the
midst of tough financing conditions in 2008, we expect
Aban to refinance most of this payment from Indian
banks in USD terms. This will also help Aban reduce its
debt cost by 2-3%. We expect Aban to repay US$280mn
of debt annually.
Structural improvement ahead for jack-ups: With an
improving oil price scenario and E&P players increasing
capex, we expect overall jack-up utilization rates to
improve to 90% in 2012. Also, we have seen high-end
jack-up utilizations recently at 95% and new orders
flowing into shipyards after three year
Investment Case
Summary & Conclusions
We maintain our Overweight rating on Aban Offshore, as we
believe the company is operationally on track to refinance its
debt and deploy its old jack-up assets and two semi-
submersibles. Given the buoyancy in the high-end jack-up
market, we are raising our longer-term rig rates forecasts for
Aban by ~20%. However, we are lowering our near-term
F2011 and F2012 earnings forecasts by 17% each to factor in:
1) delays in the deployment of Aban Abraham, which is now
expected to be deployed in March with Petrobras; and 2) a
one-quarter delay in old jack-up deployment. Hence, we are
cutting our price target to Rs975/share, which implies 37%
upside from current levels.
Will Aban capitalize on the current high rig rates? Five of
Aban’s 300ft jack-ups are due for renewal in the next six
months, while its higher-end assets will be up for renewal from
December 2011 to September 2012. We expect the old
assets, which have 70% EBIT margins, to be re-deployed at a
price of US$70k/day. In addition, the currently idle Deep
Venture (deep water asset) is expected to be deployed by
June-11, once the issues with Arktik are resolved.
Balance sheet improving, but debt refinancing required:
Aban currently has US$2.8bn of net debt with D/E of 6.0x. We
estimate Aban’s debt repayment and cash flow gap will widen
in F2012 as Aban will have to repay US$460mn of Sinvest
bonds. We believe the company will be able to refinance the
bonds, given that:
1) The company should see steady cash flows of US$280mn
per annum over the medium term.
2) Aban has strong security in terms of five new rigs valued at
US$220mn per annum (see Exhibit 11). Aban plans to raise
(refinance) only half the market value of the assets.
3) The company was able to refinance US$2bn of debt in the
midst of tough financing conditions of 2008. With this history,
we expect Aban to refinance most of its debt from Indian
banks in USD terms. We do not believe it will be difficult for the
company to obtain financing in today’s improving industry
environment.
Key Risks
• Oil price decline: Lower demand could depress oil
prices, affecting investments in the upstream sector
and possibly hurting the oil services industry. A
global economic downturn and deep drop in oil and gas
prices could break the current up-cycle of global E&P
expenditure. Short-term share price volatility could be
due to numerous factors, including the weather, political
unrest, and oil and gas prices.
• Day rates peaking: Day rates in the jack-up rig market
are peaking and could decline, thereby affecting Aban’s
EBITDA margin.
• Delays in deployment/ re-deployment: Delays in rig
start-up affects the company’s cash flows, and therefore
its debt re-payment capabilities.
• Higher interest rates: We have assumed Aban’s
average cost of debt at 7.25% for F2011 and 6.75% over
the longer term as it repays its high-cost bond debt. Every
25bp increase in interest rates would negatively affect
Aban’s F2011e and F2012e earnings by 4% each.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Aban Offshore Ltd
Improving Financial and
Operational Leverage- OW
What's Changed
Price Target Rs1,050.00 to Rs975.00
Investment conclusion: We maintain our OW rating on
Aban Offshore, as we believe the company is on track to
refinance its debt and deploy its old jack-up assets and
two semi-submersibles. Given the buoyancy in the high-
end jack-up market, we are raising our longer-term rig
rate forecasts for Aban by ~20%. However, we are
lowering our F2011-12e earnings by 17% each to factor
in: 1) delays in deployment of Aban Abraham, which we
now expect to be deployed in March with Petrobras; and
2) a one-quarter delay in old jack-up deployment. Hence,
we are reducing our price target to Rs975/share,
implying 37% upside from current levels.
Will Aban capitalize on the current high rig rates?
Five of Aban’s 300ft jack-ups come up for renewal in the
next six months, while the higher-end assets will start
coming up for renewal at end Dec-11 to Sept-12. We
expect the old assets, with 70% EBIT margins, to be
re-deployed at US$70k/day. Also, the currently idle
Deep Venture (deep water) is expected to be deployed
by June-11, once the issues with Arktik are resolved.
Will Aban be able to refinance debt? The company
has a bullet repayment of ~US$650mn due in F2012.
Given that it was able to refinance US$2bn of debt in the
midst of tough financing conditions in 2008, we expect
Aban to refinance most of this payment from Indian
banks in USD terms. This will also help Aban reduce its
debt cost by 2-3%. We expect Aban to repay US$280mn
of debt annually.
Structural improvement ahead for jack-ups: With an
improving oil price scenario and E&P players increasing
capex, we expect overall jack-up utilization rates to
improve to 90% in 2012. Also, we have seen high-end
jack-up utilizations recently at 95% and new orders
flowing into shipyards after three year
Investment Case
Summary & Conclusions
We maintain our Overweight rating on Aban Offshore, as we
believe the company is operationally on track to refinance its
debt and deploy its old jack-up assets and two semi-
submersibles. Given the buoyancy in the high-end jack-up
market, we are raising our longer-term rig rates forecasts for
Aban by ~20%. However, we are lowering our near-term
F2011 and F2012 earnings forecasts by 17% each to factor in:
1) delays in the deployment of Aban Abraham, which is now
expected to be deployed in March with Petrobras; and 2) a
one-quarter delay in old jack-up deployment. Hence, we are
cutting our price target to Rs975/share, which implies 37%
upside from current levels.
Will Aban capitalize on the current high rig rates? Five of
Aban’s 300ft jack-ups are due for renewal in the next six
months, while its higher-end assets will be up for renewal from
December 2011 to September 2012. We expect the old
assets, which have 70% EBIT margins, to be re-deployed at a
price of US$70k/day. In addition, the currently idle Deep
Venture (deep water asset) is expected to be deployed by
June-11, once the issues with Arktik are resolved.
Balance sheet improving, but debt refinancing required:
Aban currently has US$2.8bn of net debt with D/E of 6.0x. We
estimate Aban’s debt repayment and cash flow gap will widen
in F2012 as Aban will have to repay US$460mn of Sinvest
bonds. We believe the company will be able to refinance the
bonds, given that:
1) The company should see steady cash flows of US$280mn
per annum over the medium term.
2) Aban has strong security in terms of five new rigs valued at
US$220mn per annum (see Exhibit 11). Aban plans to raise
(refinance) only half the market value of the assets.
3) The company was able to refinance US$2bn of debt in the
midst of tough financing conditions of 2008. With this history,
we expect Aban to refinance most of its debt from Indian
banks in USD terms. We do not believe it will be difficult for the
company to obtain financing in today’s improving industry
environment.
Key Risks
• Oil price decline: Lower demand could depress oil
prices, affecting investments in the upstream sector
and possibly hurting the oil services industry. A
global economic downturn and deep drop in oil and gas
prices could break the current up-cycle of global E&P
expenditure. Short-term share price volatility could be
due to numerous factors, including the weather, political
unrest, and oil and gas prices.
• Day rates peaking: Day rates in the jack-up rig market
are peaking and could decline, thereby affecting Aban’s
EBITDA margin.
• Delays in deployment/ re-deployment: Delays in rig
start-up affects the company’s cash flows, and therefore
its debt re-payment capabilities.
• Higher interest rates: We have assumed Aban’s
average cost of debt at 7.25% for F2011 and 6.75% over
the longer term as it repays its high-cost bond debt. Every
25bp increase in interest rates would negatively affect
Aban’s F2011e and F2012e earnings by 4% each.
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