**[investwise]** The Pearl Sinks Aban Offshore-Another Misadventure In Global Acquisitions (CS)

 

Aban Offshore-Third Grade Management Quality No coverage for loss of profits; Aban Pearl would have contributed 35 per cent of the PBT of Aban Offshore. With the sinking of the Pearl, Aban's ability to repay it's $ 3 bn debt gets seriously impaired. How callous can a management be? This could be a significant hit for Aban – the Pearl was on contract until January 2015; we estimate remaining EBITDA of about US$360 mn with potential for earnings beyond. Aban bought the rig in September 2007 for US$211 mn and would have spent some on refurbishment as well. ● Aban does not have loss of profit insurance on the rig, but may claim a 'market value' based on independent valuation. ● Details of the incident are sparse. If Aban is found liable for the accident, full insurance amounts may not materialise. There may be liabilities for third party claims, but so far we have not heard of any leakage and all 95 personnel have been safely evacuated. ● Given the large leverage and interest costs, the loss of the Pearl revenues could hurt FY11E PBT by about 30-35%. It may take weeks to get a sense of liability – insurance talks can take months. We will review our valuation as we get clarity on the incident / potential cash flow. The Aban stock could come under pressure near term. The Aban Pearl sinks Reuters quotes President Hugo Chavez of Venezuela on Twitter saying the Aban Pearl has sunk off shore Venezuela. The company is yet to confirm/deny this as it has not been able to get 'first hand' information. All 95 personnel on board have been rescued and so far there are no reports of any leakage. The Venezuelan oil minister is quoted as saying the accident posed no risk to the environment. The Aban Pearl was drilling a gas well for the Mariscal Sucre offshore natural gas project being developed by PDVSA (not listed). On one of the best contracts for Aban Aban had purchased the Pearl in September 2007 for US$211 mn and has spent some amount refurbishing the rig (total cost could be about US$250-plus million). When purchased, the Aban Pearl was 30 years old. It was then contracted with PDVSA until January 2015 at a day rate of US$357,000. We estimate total remaining EBITDA for the contract at about US$360 mn – this assured cash flow was important for Aban's ability to service and repay its mountain of debt. What liability for Aban? This news comes at a bad time given the focus on the accident in the Gulf of Mexico. Both BP and RIG lost 25-30% of their market cap. Total peak market cap loss was about US$61 bn for all companies involved in the Deepwater Horizon accident.  A large part of this would be due to expectations of significant clean up costs and third party claims. At Venezuela, we have not heard of any leakage; all personnel are safe.  There could still be claims if third party equipment (boats etc) have been lost due to error on part of Aban. Venezuelan regulation, on the contrary may not be as strict as the US. As we get details on the accident, these should become clearer. Insurance will take time to negotiate The Aban Pearl is ensured for 'market value' and not for loss of profit. Independent valuers will have to be appointed to estimate the rig's value. Being an old semisubmersible, there is a risk the valuation may not be very high. If Aban is found liable for the accident and loss of the rig, there may be large deductibles as well. This process will involve a lot of paperwork and time – the amount Aban gets as insurance will remain uncertain for several months, we think. Could this slow new contracts? Aban has two deepwater assets it is currently marketing – the Aban Abraham and the Deep Venture (which was recently terminated by Maersk Oil (not listed)). The Abraham faces a similar situation as the Pearl – it is old, has been recently refurbished, and had teething problems on deployment.  The incident with the Pearl could slow ongoing negotiations that Aban may have for these rigs as well –especially if there is hint of operator error. This would exert further pressure on near-term cash flow and earnings estimates. A major blow to morale? ABAN has just come out of a major debt restructuring and increased rig utilisation/cash flow through new contracts – management must have been looking forward to easier times. This incident could affect morale – potentially keeping near-term cash flow tight and Aban's bankers feeling uncertain. Near-term earnings estimates could be affected – however, there are several uncertainties on cash flow impact due to the Aban Pearl incident. We will review our valuation as we get clarity on the incident/potential cash flow. The Aban stock could come under pressure near term meanwhile. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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