BSEIndia: All Stock Market News: DG - Aban Offshore : Initiating coverage with ADD rating and target price of Rs. 3,900

Thursday, June 12, 2008

DG - Aban Offshore : Initiating coverage with ADD rating and target price of Rs. 3,900

Shallow-water player rides crude crest. High crude prices and increasing profitability of oil firms will sustain demand for offshore drilling rigs. We expect deep-water rig dayrates to remain high for 3-5 years but expect jackup rates to decline led by upcoming large supply and region-specific events. Aban, with mainly jackups and uncommitted assets, may be able to make the most of the near-term opportunity but lag behind in the longer deep-water cycle unless it invests more in deep-water rigs.

Recent decline offers 14% upside to our target price, initiate with ADD

We believe the current share price does not fully capture the potential of the relatively young fleet in its Singapore subsidiary. However, we do not expect significant upside in jackup rates (~US$200,000/day), thus constricting our target price; a 5% hike in assumed dayrates can raise DCF-based value to Rs4,385. Potential acquisitions of further deep-water assets can extend EBITDA growth beyond FY2010E and provide upside risk to our target price.

Higher offshore spend in deeper waters, expect higher deep-water rig rates

We expect high crude prices, increasing demand for crude and shortage of drilling opportunities to sustain high expenditure in offshore oil and gas operations. Deep-water will account for higher share of incremental drilling expenditure due to limited resource availability in shallow-waters. Reducing spend on shallow-water drilling and large asset additions will lead to softer jackup dayrates; however, increasing deep-water spend and low asset availability will keep deep-water dayrates strong over the next 3-5 years.

Fleet expansion to drive revenues at a CAGR of 36% over FY2008-11E

We expect new asset additions and re-pricing of existing assets to drive revenues and PAT at a CAGR of 36% and 69%, respectively, over FY2008-11E. However, we expect EBITDA margin to decline post FY2010E as we expect softening dayrates for jackups (contributing 69% to FY2010E revenues). We model Rs73 bn of free cash flow generation over FY2009-11E, thus reducing net debt-to-equity ratio to 0.6X at end-FY2011E from 11.7X at end-FY2008E.

Key risks—lower jackup dayrates, large uncommitted days and oil prices

The key risk to our call is lower-than-estimated jackup dayrates following an upsurge in new build jackups. Aban is dependent on jackups and 34% and 63% of its jackup rig days for FY2009E and FY2010E, respectively, remain uncommitted. Other risks include higher-than-expected operating costs and higher visibility on other forms of energy.

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