Aban Offshore - Insurance costs hit bottom line :: Macquarie Research,

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Aban Offshore
Insurance costs hit bottom line
Event
 Aban Offshore (ABAN) announced consolidated PAT of Rs886m, which was
significantly lower than estimates, due to a sharper-than-expected rise in
insurance costs and lower other income. With insurance expenses likely to
remain high in the medium term after the Macondo incident last year, we cut
our profit estimate by ~10% and our TP to Rs590 from Rs725. However, rig
rates have bottomed and are expected to rise slowly in tandem with
increasing utilizations, and ABAN has secured contracts for all except 2 of its
rigs. We rate ABAN a high risk/high gain leveraged play and maintain OP.
Impact
 Insurance costs rose to Rs297m (up 1.4x YoY, 54% QoQ): Insurance costs
for the company have risen due to higher premiums in conjunction with the
increased coverage required after the BP-Maconodo deepwater well incident
and the sinking of Aban Pearl last year, which together pushed up insurance
costs for the industry overall.
 Fleet utilization healthy, but older rigs are locked-in at low rates: ABAN
has contracted out all but 2 of its rigs, including the high earning drillship Aban
Abraham. The Aban III contract with ONGC (US$62k/day) is to start in
October 2011. However, the older rigs (Aban I–VII) are locked-in at low rates
(US$60-70/day), which are the new benchmark for that class of rigs.
 Exchange fluctuation loss of Rs55m and lower other income weakened
profits further. However, write-offs due to the bankruptcy of Petrojack ASA
(Norwegian subsidiary) are over, and none has spilled over to the quarter.
Earnings and target price revision
 FY12-14E PAT cut by ~10% due to increased insurance costs, which ABAN
management indicated would remain at current levels. TP cut by 19% to
Rs590 to factor in lowered earnings and increased risk perception.
Price catalyst
 12-month price target: Rs590.00 based on a DCF methodology.
 Catalyst: Debt refinancing/equity raising; fresh contracts.
Action and recommendation
 ABAN has locked-in most of its rigs for long-term contracts and, hence, is
assured of reasonable, uninterrupted cashflows. Industry rig rates are
expected to inch up, especially considering the increase in utilizations being
observed currently. However, the rates for the older rigs are relatively low,
and a lack of further rigs to contract out due to balance sheet constraints
against the expansion of its fleet raises a question about profit growth in the
near term. Debt repayment issues remain, as 10% of its loan payments need
to be refinanced/restructured due to a lack of sufficient cashflows. However,
given very low LIBOR, the company has in fact been managing to re-finance
at a lower rate of 5%. A drop in crude prices increases perceived risks to the
deep cyclical, leveraged nature of ABAN’s business.