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Aban Offshore (Aban)
Energy
Concerns maybe overdone. We reiterate our positive stance on the Aban Offshore
stock given attractive valuations amid accentuated concerns on debt-repayment ability.
We have updated our earnings model for the FY2011 annual report. We maintain our
BUY rating on Aban Offshore with a DCF-based target price of `670 (`700 previously)
given (1) the stock trading at inexpensive 3.6X FY2012E EPS and (2) large potential
upside from current levels. Key downside risks to earnings stem from (1) lower
utilization of jackups and (2) lower dayrates.
Jackup utilization to remain stable despite increase in supply
As per ODS-Petrodata data, global jackup utilization rate is expected to remain stable at 76-79%
in CY2012E versus 78% in September 2011 despite addition of 31 new jackups in the same
period. We have assumed a decline in jackup rates for the new contracts in FY2012-13E. However,
we do not rule out upside to our earnings estimates from higher-than-expected dayrates led by
any improvement in the demand-supply balance.
Sustained high crude prices augur well for the offshore drilling services industry
We see sustained high level of 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. Crude oil price (Dated Brent) has remained above US$100/bbl
since February 2011. We expect crude prices to soften from the current high levels, but expect
them to remain in a healthy range of US$85-100/bbl in the medium term.
Retain BUY on attractive valuations; debt repayment to ease concerns
We maintain our BUY rating on Aban Offshore noting (1) large potential upside to our revised
DCF-based target price of `670 (`700 previously) from current levels and (2) the stock trading at
attractive valuations at 3.6X FY2012E EPS. We note that the stock is currently trading at 6.8X
FY2012E EBITDA and 6.4X FY2013E EBITDA; the EV/EBITDA of the company continues to be high
despite the sharp correction in the stock price given the large debt in its capital structure.
However, we expect the multiple to turn favorable as the company repays the debt using its cash
flow generated over the next few years. We highlight that Aban’s net debt/EBITDA ratio stands at
6X and 5.6X in FY2012E and FY2013E and EBITDA to interest coverage ratio is at 2.2X and 2.4X in
FY2012E and FY2013E.
Earnings revision
We have revised our FY2012-13E EPS to `99 (+4%) and `103 (-4.3%) to reflect (1) FY2011 annual
report, (2) revised exchange rate assumptions, (3) delay in contracting of idle jackups and (4) other
minor changes. We have revised our exchange rate assumption for FY2012E to `46.3/US$ versus
`44.75/US$ previously.
Key takeaways from FY2011 annual report
Gross block. Aban’s consolidated gross block declined to `163 bn at end-FY2011 from
`173 bn at end-FY2010 due to removal of Aban Pearl. The company reported a
translation loss of `965 mn charged to the gross block in FY2011.
Depreciation. Aban reported increase in depreciation to `4.9 bn for FY2011 versus `4.6
bn in FY2010 despite the decline in gross block. This was due to full-year depreciation for
Aban Abraham which was added in 2HFY10.
Diminution in value of investments. The company made a provision for diminution in
the value of long-term investments at `513 mn due to diminution in value of equity
investment by a foreign subsidiary in Petrojack, a Norwegian company. We note that
Aban Offshore has provided for the full investment of `1.7 bn in Petrojack.
Net debt. Aban’s net debt (including preference shares) declined to `127.8 bn at end-
FY2011 from `142.5 bn at end-FY2010. The company was able to pay off the debt using
(1) `6.3 bn of cash flow generation from business operations and (2) `10.5 bn from
receipt of insurance claim against Aban Pearl.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Aban Offshore (Aban)
Energy
Concerns maybe overdone. We reiterate our positive stance on the Aban Offshore
stock given attractive valuations amid accentuated concerns on debt-repayment ability.
We have updated our earnings model for the FY2011 annual report. We maintain our
BUY rating on Aban Offshore with a DCF-based target price of `670 (`700 previously)
given (1) the stock trading at inexpensive 3.6X FY2012E EPS and (2) large potential
upside from current levels. Key downside risks to earnings stem from (1) lower
utilization of jackups and (2) lower dayrates.
Jackup utilization to remain stable despite increase in supply
As per ODS-Petrodata data, global jackup utilization rate is expected to remain stable at 76-79%
in CY2012E versus 78% in September 2011 despite addition of 31 new jackups in the same
period. We have assumed a decline in jackup rates for the new contracts in FY2012-13E. However,
we do not rule out upside to our earnings estimates from higher-than-expected dayrates led by
any improvement in the demand-supply balance.
Sustained high crude prices augur well for the offshore drilling services industry
We see sustained high level of 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. Crude oil price (Dated Brent) has remained above US$100/bbl
since February 2011. We expect crude prices to soften from the current high levels, but expect
them to remain in a healthy range of US$85-100/bbl in the medium term.
Retain BUY on attractive valuations; debt repayment to ease concerns
We maintain our BUY rating on Aban Offshore noting (1) large potential upside to our revised
DCF-based target price of `670 (`700 previously) from current levels and (2) the stock trading at
attractive valuations at 3.6X FY2012E EPS. We note that the stock is currently trading at 6.8X
FY2012E EBITDA and 6.4X FY2013E EBITDA; the EV/EBITDA of the company continues to be high
despite the sharp correction in the stock price given the large debt in its capital structure.
However, we expect the multiple to turn favorable as the company repays the debt using its cash
flow generated over the next few years. We highlight that Aban’s net debt/EBITDA ratio stands at
6X and 5.6X in FY2012E and FY2013E and EBITDA to interest coverage ratio is at 2.2X and 2.4X in
FY2012E and FY2013E.
Earnings revision
We have revised our FY2012-13E EPS to `99 (+4%) and `103 (-4.3%) to reflect (1) FY2011 annual
report, (2) revised exchange rate assumptions, (3) delay in contracting of idle jackups and (4) other
minor changes. We have revised our exchange rate assumption for FY2012E to `46.3/US$ versus
`44.75/US$ previously.
Key takeaways from FY2011 annual report
Gross block. Aban’s consolidated gross block declined to `163 bn at end-FY2011 from
`173 bn at end-FY2010 due to removal of Aban Pearl. The company reported a
translation loss of `965 mn charged to the gross block in FY2011.
Depreciation. Aban reported increase in depreciation to `4.9 bn for FY2011 versus `4.6
bn in FY2010 despite the decline in gross block. This was due to full-year depreciation for
Aban Abraham which was added in 2HFY10.
Diminution in value of investments. The company made a provision for diminution in
the value of long-term investments at `513 mn due to diminution in value of equity
investment by a foreign subsidiary in Petrojack, a Norwegian company. We note that
Aban Offshore has provided for the full investment of `1.7 bn in Petrojack.
Net debt. Aban’s net debt (including preference shares) declined to `127.8 bn at end-
FY2011 from `142.5 bn at end-FY2010. The company was able to pay off the debt using
(1) `6.3 bn of cash flow generation from business operations and (2) `10.5 bn from
receipt of insurance claim against Aban Pearl.
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