Aban Offshore (ABAN.BO) 2Q: Operationally Below; Expect A 2H Pick Up  Citi Research

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Aban Offshore (ABAN.BO)
2Q: Operationally Below; Expect A 2H Pick Up
 2Q below — PAT at Rs792.5m (-11% qoq, +5% yoy) was below estimates primarily
due to: (1) lower than expected qoq increase in revenues (1Q included cUS$5-6m of
one-off mobilization fee for Aban Abraham), (2) lower EBITDA margins of 60% (62% in
1Q), and (3) higher interest/depreciation due to INR weakness (not much of a concern,
however, given revenues, costs, debt are all largely US$-denominated).
 Expect pick up in 2H — We expect Aban’s revenues and profitability to pick up in 3-
4Q, led by: (1) commencement of the new 3-yr ONGC contract for Aban III by Nov-11E
(idle in 2Q), (2) possible commencement of a new contract for Aban V (idle in 2Q, new
contract yet to be awarded), and (3) fresh contribution from Aban VII (idle in 2Q, has
begun a short-term contract with GSPC, and has other short-term contracts in place for
the next year). Contribution from Tahara is expected to go down as it remains idle due
to approval issues, though the overall impact would be lower given lower margins.
 Rig market tightening — As per Citi analyst Horng Han Low (see ‘Singapore Drill Bits:
More Resilient to Headwinds than in 2009 Downturn’ dated Nov 2), rig day rates have
been trending higher YTD and are likely to continue rising in 2012, based on comments
by offshore drillers and industry observers. He believes that while concerns remain
over the number of newbuild completions scheduled in 2013 (31 jack-ups, 24
drillships), incoming supply will place a cap, rather than a drag, on day rates.
 Deleveraging yet to play out — Earlier this year, Aban had cUS$400-450m of bullet
payments on its debt due in the Jan-Apr’12 period. This is now down to cUS$340m,
with cUS$100m having been refinanced. We remain confident of Aban’s ability to
refinance the balance amount, and the next few months would be critical in this regard.
Any news flow on this front would be a key stock driver, in our view, bringing to fore
Aban’s deleveraging argument, which we believe remains intact. We reiterate Buy with
a Rs730 TP, reducing FY12-14E earnings by 3-8% to account for 1H performance and
new contract announcements. Net debt currently stands at US$2.72bn (US$2.79bn as
on Mar-11). We forecast operating cash flow of US$180-220m over FY12-14E.