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Aban Offshore Ltd
Concerns on Iran Exposure and Debt Overdone
Quick Comment – Cheapest offshore driller globally
on all metrics: Aban has corrected by over 20% in the
past week on concerns about debt and high exposure to
Iran and the Middle East. We believe that the concerns
on both counts are overdone as: 1) Most of Aban’s rigs
placed with national oil companies are operating
normally and have the lowest working capital cycles
among all its assets placed globally. 2) Since Aban has
estimated cash flow of US$280mn in future years, with
strong assets as collateral charge, Aban should be able
to refinance its US$450mn bond debt in F2012.
Aban’s Iran exposure high but not affected: Six of
Aban’s high-end jack-ups are deployed in Iran at
dayrates of US$165-170k. They account for US$300mn
or 42% in of total revenues and 52-55% of EBITDA.
Currently, it has not seen any impact on these rigs. Also
the company has insurance in place for these rigs in
case of any damages (similar to Aban Pearl).
Will Aban be able to refinance debt? Aban 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% or save US$65-70mn annually in interest costs.
We expect Aban to repay US$280mn of debt annually.
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
Valuation attractive: Aban is trading at EV/EBITDA of
6.8x and P/E of 4.3x on F2012e compared to global
offshore drillers trading at average P/E of 10.6x and
EV/EBITDA of 8.1x, making valuations attractive.
Valuation
Price target calculation: We derive our price target for Aban
on a DCF-based approach (previously P/E based), since we
now we have visibility on the next four years’ contracts and,
hence, the company’s earnings. Our DCF valuation is based
on a WACC of 9.5% (cost of equity 13.6%, risk-free rate of
7.5%, and beta of 1.01).
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
Concerns on Iran Exposure and Debt Overdone
Quick Comment – Cheapest offshore driller globally
on all metrics: Aban has corrected by over 20% in the
past week on concerns about debt and high exposure to
Iran and the Middle East. We believe that the concerns
on both counts are overdone as: 1) Most of Aban’s rigs
placed with national oil companies are operating
normally and have the lowest working capital cycles
among all its assets placed globally. 2) Since Aban has
estimated cash flow of US$280mn in future years, with
strong assets as collateral charge, Aban should be able
to refinance its US$450mn bond debt in F2012.
Aban’s Iran exposure high but not affected: Six of
Aban’s high-end jack-ups are deployed in Iran at
dayrates of US$165-170k. They account for US$300mn
or 42% in of total revenues and 52-55% of EBITDA.
Currently, it has not seen any impact on these rigs. Also
the company has insurance in place for these rigs in
case of any damages (similar to Aban Pearl).
Will Aban be able to refinance debt? Aban 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% or save US$65-70mn annually in interest costs.
We expect Aban to repay US$280mn of debt annually.
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
Valuation attractive: Aban is trading at EV/EBITDA of
6.8x and P/E of 4.3x on F2012e compared to global
offshore drillers trading at average P/E of 10.6x and
EV/EBITDA of 8.1x, making valuations attractive.
Valuation
Price target calculation: We derive our price target for Aban
on a DCF-based approach (previously P/E based), since we
now we have visibility on the next four years’ contracts and,
hence, the company’s earnings. Our DCF valuation is based
on a WACC of 9.5% (cost of equity 13.6%, risk-free rate of
7.5%, and beta of 1.01).
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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