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UBS Investment Research
Aban Offshore
3QFY11: Results miss estimates
Delay in deployment of Deep Venture leads to losses in the JV
Aban reported 3QFY11 revenues of Rs 7.8bn. EBITDA was in line with UBSe but
PAT at Rs 612 mn missed UBS and consensus estimates primarily on Rs 433mn
loss on its JV for Deep Venture. Due to ongoing arbitration with Arktik about its
bareboat charter it has been difficult to deploy Deep Venture. Aban has started
negotiating for a settlement with Arktik and we factor in a contract in 2QFY12. We
lower FY11E/12E EPS from Rs98.39/94.46 to Rs96.5/91.2 factoring in a delay in
deploying Deep Venture (FY11E/12E) and higher tax rate & exceptional items
(FY11E).
Operational status; two rig contracts signed in January
The company maintained an EBITDA margin of 66% in the quarter. Operations
remained on track as Aban II and Aban VII have recently been deployed at
attractive rates. As contracts for 3 more Aban series rigs come up for renewal we
expect timely deployment of rigs to be a trigger for the stock.
Stock looks attractive vs. peers; concerns over Iran, leverage overdone
The stock has fallen 31% in 2011. Aban derives about 40% of its revenues from
Iran. Since these are the new rigs, we see little earnings risk here in a worst case
scenario. At 6.0x FY12e PE, the stock looks cheap vs peers. We do believe though,
that the tough liquidity environment may remain a near term overhang.
Valuation: Lower PT to Rs850/share, maintain Buy
We lower our TP from Rs1216/sh to Rs850/sh due to a tighter liquidity
environment. The 10-year Government bond yield has increased by 30bps since the
beginning of the year; hence we now assume a higher WACC - 12.88% vs 12.02%.
Results below estimates
Aban Offshore reported revenues of Rs 7.8bn for 3QFY11 (-8% YoY, -6% QoQ)
versus UBS expectation of Rs 9.8bn. EBITDA remained flat YoY and declined
7% QoQ. PAT at Rs 0.6bn (-31% YoY, -17% QoQ) missed UBS and consensus
estimates primarily due to a loss of Rs 0.4bn, representing Aban’s share in the
joint venture.
The company maintained an EBITDA margin of 66% in the quarter. Operations
remained on track as Aban II and Aban VII have recently been deployed in
January; Inclusive of mobilisation charges Aban II will be earning a rate of
US$ 85,000/day. As contracts for 3 more Aban series rigs come up for renewal
we expect timely deployment of rigs to be a trigger for the stock.
Valuation: to factor in a tougher interest rate
environment, we conservatively lower our Price
Target but maintain a Buy rating.
We lower our TP from Rs1216/share to Rs850/share due to the current
environment of tightened liquidity. We increase our WACC estimate to 12.88%
from the earlier 12.02% on the back of increasing interest rates. The yield on 10-
year Government bond has increased by 30 bps since the beginning of the year.
With a high leverage of 5.23x, debt refinancing for its bullet payment in FY12 is
highly critical for the company.
The major risk to our thesis is the company’s inability to refinance its debt.
Aban Offshore
Aban Offshore is the flagship company of the Aban Group. It was founded in
1986 by M.A. Abraham. Aban Offshore is the largest drilling entity in the
private sector. The company launched its first contract drilling service for
ONGC in 1987 with two modern jack-up drilling rigs acquired from the US.
Currently Aban has 18 rigs and one floating production unit. Of the 18 rigs,
three are drill ships and the remainder jack-ups.
Statement of Risk
The offshore industry is a derived demand industry. We believe the fundamental
risk factor associated with offshore drillers such as Aban Offshore is rig rates
and the utilisation of rigs. Rig rates and the utilisation of rigs depend upon
capital expenditure from oil firms, which in turn is dependent on the oil price.
Low oil prices would force oil firms to reduce capex on exploration and
development, which in turn would pull down rig rates and utilisation. Secondly,
Aban has become highly leveraged post its acquisition of Sinvest in 2006 and
had a high net-debt to equity ratio of 6.5 in FY10. The business cycle having
turned, refinancing of debt due for repayment in FY12 will become critical for
the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Aban Offshore
3QFY11: Results miss estimates
Delay in deployment of Deep Venture leads to losses in the JV
Aban reported 3QFY11 revenues of Rs 7.8bn. EBITDA was in line with UBSe but
PAT at Rs 612 mn missed UBS and consensus estimates primarily on Rs 433mn
loss on its JV for Deep Venture. Due to ongoing arbitration with Arktik about its
bareboat charter it has been difficult to deploy Deep Venture. Aban has started
negotiating for a settlement with Arktik and we factor in a contract in 2QFY12. We
lower FY11E/12E EPS from Rs98.39/94.46 to Rs96.5/91.2 factoring in a delay in
deploying Deep Venture (FY11E/12E) and higher tax rate & exceptional items
(FY11E).
Operational status; two rig contracts signed in January
The company maintained an EBITDA margin of 66% in the quarter. Operations
remained on track as Aban II and Aban VII have recently been deployed at
attractive rates. As contracts for 3 more Aban series rigs come up for renewal we
expect timely deployment of rigs to be a trigger for the stock.
Stock looks attractive vs. peers; concerns over Iran, leverage overdone
The stock has fallen 31% in 2011. Aban derives about 40% of its revenues from
Iran. Since these are the new rigs, we see little earnings risk here in a worst case
scenario. At 6.0x FY12e PE, the stock looks cheap vs peers. We do believe though,
that the tough liquidity environment may remain a near term overhang.
Valuation: Lower PT to Rs850/share, maintain Buy
We lower our TP from Rs1216/sh to Rs850/sh due to a tighter liquidity
environment. The 10-year Government bond yield has increased by 30bps since the
beginning of the year; hence we now assume a higher WACC - 12.88% vs 12.02%.
Results below estimates
Aban Offshore reported revenues of Rs 7.8bn for 3QFY11 (-8% YoY, -6% QoQ)
versus UBS expectation of Rs 9.8bn. EBITDA remained flat YoY and declined
7% QoQ. PAT at Rs 0.6bn (-31% YoY, -17% QoQ) missed UBS and consensus
estimates primarily due to a loss of Rs 0.4bn, representing Aban’s share in the
joint venture.
The company maintained an EBITDA margin of 66% in the quarter. Operations
remained on track as Aban II and Aban VII have recently been deployed in
January; Inclusive of mobilisation charges Aban II will be earning a rate of
US$ 85,000/day. As contracts for 3 more Aban series rigs come up for renewal
we expect timely deployment of rigs to be a trigger for the stock.
Valuation: to factor in a tougher interest rate
environment, we conservatively lower our Price
Target but maintain a Buy rating.
We lower our TP from Rs1216/share to Rs850/share due to the current
environment of tightened liquidity. We increase our WACC estimate to 12.88%
from the earlier 12.02% on the back of increasing interest rates. The yield on 10-
year Government bond has increased by 30 bps since the beginning of the year.
With a high leverage of 5.23x, debt refinancing for its bullet payment in FY12 is
highly critical for the company.
The major risk to our thesis is the company’s inability to refinance its debt.
Aban Offshore
Aban Offshore is the flagship company of the Aban Group. It was founded in
1986 by M.A. Abraham. Aban Offshore is the largest drilling entity in the
private sector. The company launched its first contract drilling service for
ONGC in 1987 with two modern jack-up drilling rigs acquired from the US.
Currently Aban has 18 rigs and one floating production unit. Of the 18 rigs,
three are drill ships and the remainder jack-ups.
Statement of Risk
The offshore industry is a derived demand industry. We believe the fundamental
risk factor associated with offshore drillers such as Aban Offshore is rig rates
and the utilisation of rigs. Rig rates and the utilisation of rigs depend upon
capital expenditure from oil firms, which in turn is dependent on the oil price.
Low oil prices would force oil firms to reduce capex on exploration and
development, which in turn would pull down rig rates and utilisation. Secondly,
Aban has become highly leveraged post its acquisition of Sinvest in 2006 and
had a high net-debt to equity ratio of 6.5 in FY10. The business cycle having
turned, refinancing of debt due for repayment in FY12 will become critical for
the company.
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