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UBS Investment Research
Aban Offshore
Deep Venture to be returned
„ Dispute on drillship, Deep Venture, settled—rig to be returned to Arktik
Aban Offshore (Aban) ran Deep Venture in a 50/50 JV. However, it was difficult
to put the rig on contract due to ongoing arbitration, and Aban had been making
losses on the JV. Following the settlement, the JV will be returning the rig to
Arktik (owner), and in lieu of the onboard equipment that belonged to the JV, the
JV has received a total of US$138m. Although this is a negative for the company’s
earnings, getting cash upfront will improve Aban’s cash position—a matter of
immediate concern.
„ We lower our EPS estimates
We expected the company to continue making losses on the Deep Venture JV till
Q2 FY12 and then assumed profits. We therefore increase our FY11 EPS estimate
4.6% and cut our FY12/13/14 EPS estimates 9.9%/7.7%/9.4%. The drop in JV
earnings is partially offset by the lower interest costs for the company. Our
valuation for Aban therefore remains unchanged.
„ Cash flow was immediate concern: US$69m will help
Aban is scheduled to make total debt repayments of US$374m in FY12, in addition
to servicing interest of US$268m. We still expect Aban to refinance approximately
US$400m, but the US$69m receipt will help in managing cash flow and act as a
positive for sentiment when leverage is the number one concern investors have.
„ Valuation: maintain price target of Rs850.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
13.04%. We believe Aban’s strategy is to concentrate on revenue consolidation
and strengthening its balance sheet. However, jack-up rig oversupply could be a
short-term overhang on the industry
Background
Aban’s Deep Venture rig was on an 18 year Bareboat Charter from Arktik (the
owner), with the charter under arbitration because the Russian Federal Agency
for State Property Management had sought to invalidate the charter as advance
statutory approval was not obtained when taking the rig on charter.
The charge for the bareboat charter was a minimal US$20,000 per day. The lack
of clarity on the dispute had been one of the factors weighing on the stock, in
our view.
Does the event affect our valuation?
Our price target is unchanged in the light of this event as the valuation effect of
lower income from the JV is offset by the lower debt and hence lower interest
costs.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We incorporate
rig-by-rig projections to model Aban and arrive at our price target of Rs850.00.
The current share price implies an EBITDA margin of 45% for Aban on a
consolidated basis—which is low, given that Aban’s EBITDA has historically
ranged from 50% to 60%. We assume: 1) 13.04% WACC and 2) that half of the
older refurbished rigs will retire after the visible horizon of six years.
Q 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.
Q 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
Deep Venture to be returned
„ Dispute on drillship, Deep Venture, settled—rig to be returned to Arktik
Aban Offshore (Aban) ran Deep Venture in a 50/50 JV. However, it was difficult
to put the rig on contract due to ongoing arbitration, and Aban had been making
losses on the JV. Following the settlement, the JV will be returning the rig to
Arktik (owner), and in lieu of the onboard equipment that belonged to the JV, the
JV has received a total of US$138m. Although this is a negative for the company’s
earnings, getting cash upfront will improve Aban’s cash position—a matter of
immediate concern.
„ We lower our EPS estimates
We expected the company to continue making losses on the Deep Venture JV till
Q2 FY12 and then assumed profits. We therefore increase our FY11 EPS estimate
4.6% and cut our FY12/13/14 EPS estimates 9.9%/7.7%/9.4%. The drop in JV
earnings is partially offset by the lower interest costs for the company. Our
valuation for Aban therefore remains unchanged.
„ Cash flow was immediate concern: US$69m will help
Aban is scheduled to make total debt repayments of US$374m in FY12, in addition
to servicing interest of US$268m. We still expect Aban to refinance approximately
US$400m, but the US$69m receipt will help in managing cash flow and act as a
positive for sentiment when leverage is the number one concern investors have.
„ Valuation: maintain price target of Rs850.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
13.04%. We believe Aban’s strategy is to concentrate on revenue consolidation
and strengthening its balance sheet. However, jack-up rig oversupply could be a
short-term overhang on the industry
Background
Aban’s Deep Venture rig was on an 18 year Bareboat Charter from Arktik (the
owner), with the charter under arbitration because the Russian Federal Agency
for State Property Management had sought to invalidate the charter as advance
statutory approval was not obtained when taking the rig on charter.
The charge for the bareboat charter was a minimal US$20,000 per day. The lack
of clarity on the dispute had been one of the factors weighing on the stock, in
our view.
Does the event affect our valuation?
Our price target is unchanged in the light of this event as the valuation effect of
lower income from the JV is offset by the lower debt and hence lower interest
costs.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We incorporate
rig-by-rig projections to model Aban and arrive at our price target of Rs850.00.
The current share price implies an EBITDA margin of 45% for Aban on a
consolidated basis—which is low, given that Aban’s EBITDA has historically
ranged from 50% to 60%. We assume: 1) 13.04% WACC and 2) that half of the
older refurbished rigs will retire after the visible horizon of six years.
Q 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.
Q 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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