>ABAN OFFSHORE LIMITED (FIRST GLOBAL)

The Story…

What all can change in a month!

Aban, written off for dead, is back. And if you think about it…what really is the problem with
company?

Sure, oil prices were down. But that was yesterday. Now oil prices are headed back up to the $80
levels and beyond, given the weakness of the US Dollar.

Aah…yes, the company has a bit of debt.

Excellent! That’s precisely what we are looking for these days. We all loooooove companies with
loads of debt these days, don’t we…Because we wanna give them moneys in QIPs, FCCBs, PE, off
balance sheet the way Ramalinga gave to Satyam…whatever…

Short point is: Aban’s twin problems are receding fast, and before you know, they’ll have
disappeared altogether. Let it get some equity, and a whole new company emerges from the
chrysalis.

Valuations are totally undemanding at 4-5x earnings. The stock had an all-time high 5.5x higher than its current price.

That’s good news.

Because there is plenty of room for the stock to run before it hits the wall. Global peers in the form of oil services companies are also seeing their stocks do well. No reason for Aban to sit out the party.

Aban could so easily be a Rs.2000 stock…Buy it.


The Slightly Longer Story

Aban Offshore is a stock which moves in line with oil prices like any other stock in the oil and gas service industry. The reason is high oil prices induce oil companies to spend more on exploration and production and this creates demand for offshore as well as onshore oil services which includes drilling rigs. The supply of offshore drilling rigs is tighter than onshore due to which high oil price induced demand results in high dayrates for offshore rigs. Aban Offshore has a fleet of 21 offshore rigs and is naturally a big beneficiary of the high oil price scenario. The company posted a net profit of Rs.5.5 bn in FY09 which is almost 350% higher than FY08. The company’s EBIDTA margins were 55.4% last year indicating the high rates it enjoyed and limited cost. When oil prices started falling from H2 CY08, Aban’s stock started falling and lost almost 95% of its value at the lowest market price while crude lost 77% to fall to less than $33 a barrel.

However with the rebound in oil prices, the stock recovered by almost 5 folds and is trading at above Rs.1000 a share. The second concern was Aban’s balance sheet which has a debt of more than $3 bn which Aban raised when acquiring Norwegian based offshore rig player Sinvest in FY08. By FY08 end, it had an astoundingly high debt equity of 16 which has come down to 11 in FY09 end. The tight credit conditions back then had raised concerns on its ability to deleverage itself, which put additional pressure on the company’s stock.. However considering the present favourable environment, we expect Aban to raise enough funds to refinance the existing debt at better terms and pay back the $150 mn bullet loan that is due on December 2009. We reinitiate Aban with a rating of “Outperform”.

Valuation & Outlook

The outlook of the sector is a function of oil prices and especially the jack up market is dependent on the short term movement of oil prices. Aban’s stock took a severe beating when oil fell from over $146 to less than $33, losing more than 90% of its value. So a reversal on the basis of higher crude prices is expected. Aban tends to secure term contracts and hence redeploying rigs in a high oil price scenario and at better rates gives visibility to its earnings in the up to the term of the contracts. News flow relating to securing new contracts, redeployment of drilling rigs and realizing would be crucial for the stocks re-rating. Currently the stock is trading at a low PE of 4.1 to FY10 earnings. The EV/EBIDTA is 6.5 FY10 earnings.

Key Growth Drivers

■ Rebound in oil prices
The rebound in oil prices from the lows of $30 a barrel to almost $70 has changed the outlook of the offshore oil & gas industry. Historically oil prices and rig accounts (a measure of drilling rig activity) has moved in the same direction. An increase in rig count means that, more rigs are in demand resulting in better day rates and earnings for the rig companies. The offshore space is becoming more and more promising as most of the on land oil has already been discovered. Offshore jack up rigs have witnessed high rates of $200,000 a day in CY08 with high oil prices. Jack up rigs unlike drillships and semisubs are the most responsive to oil prices and considering Aban has sixteen jack ups, the rise in oil prices would multiply its earnings in FY10. The visibility of earnings for FY11 would depend on prevailing oil prices then.

■ Deployment of rigs
Aban has a fleet of twenty one rigs. Currently, sixteen rigs are deployed, out of which five are under short-term contracts that will expire by August 2009. The Indian parent company (on a standalone basis) is in a comfortable position, with only one rig, the FPU, Tahara nearing expiry in July 2009. The company expects it to be re-deployed at a higher rate as the present rate is low in comparison to the market dayrates of other floating units.

■ Favourable environment for fund raising
In FY08, the Sinvest purchase had resulted in a debt burden of $3.1 bn, and a debt-equity of 16, as on FY08 end. Aban’s debt equity ratio currently stands at around 11. We expect Aban to raise enough funds to to refinance its debt, at better terms and lower cost. The company has to meet a $150 mn (Norwegian Kroners bond loan) in December 2009.

Key Risks

The key risk is a fall in oil prices once again which would again dampen the outlook of the sector and result in rigs remaining idle and hence lower earnings. This would also limit Aban’s ability to clear its debt. Technical snags is another risk which may result in actual earnings lower than expected as the rigs would remain docked and drilling delayed.

Company Background

Aban Offshore Limited is India’s largest offshore oil and gas drilling company and owns twenty one offshore assets. The company has two business segments: offshore oil drilling and production services, and wind energy services and wind power generation. Aban’s drilling services include drilling of exploration wells, appraisal wells and production wells. The company has jackup rigs that enable it to achieve a drilling depth of 30,000 feet in a water depth of up to 375 feet, and also owns drillships and semisubmersibles capable of drilling in greater water depths ranging up to 6,000 feet (please refer to Aban Offshore’s rig fleet details on Page 5). Aban has an installed capacity of approximately 65 megawatts in Tamil Nadu connected to the grid of the Tamil Nadu Electricity Board. However, the contribution of the wind business to Aban’s revenues is negligible. Aban completed the acquisition of Norway based Sinvest in CY08, thereby becoming the world’s tenth largest drilling company.

Business Highlights

Aban’s Singapore subsidiary acquired Sinvest in FY08 and was able to deploy six rigs in H1 FY09 at high day rates. For FY09, Aban recorded a growth of 57.6% in revenues to Rs.31.8 bn, on the back of high rates. The company’s net profit rose 351% to Rs.5.5 in FY09. However, the phenomenal growth cooled down towards the end of the financial year and Aban posted a loss of Rs.1.3 bn in Q4 FY09, mainly due to the impairment of its jackup rig, Murmanskaya, which resulted in an increase of 131% in depreciation. The impairment charge was a non-cash expenditure and will not impact Aban’s cashflows.

Aban has two bareboat charter agreements with the Russian company, Arktikmorneftegazrazvedka and has a 50% stake in Deep Venture drillship. The bareboat charter for Murmanskaya will expire in November 2009. Aban has also taken delivery of three new rigs and managed to secure contracts for two of the rigs, though these contracts are short term in nature. All the assets of the parent company are also under long-term contracts until beyond FY10, except the Tahara floating unit, for which the contract expires in mid 2009, though the contract rate for Tahara is much low and it is expected to be re-deployed at the existing, if not better rates. Aban II’s contract expires in May 2010, which we expect to be renewed, as the client is none other than ONGC.

Financial Highlights

Over the period FY05-09, Aban’s revenues grew at a CAGR of 82% to Rs.31.8 bn in FY09. Aban’s massive growth came in FY08, when it acquired Sinvest, which led to the company’s revenues almost tripling from the 2007 level. In FY09, the company reported a net profit of Rs.5.5 bn, which translated into an EPS of Rs.144, six times higher than the FY08 level. In the last five years, Aban’s operating margin has averaged at 52%, but rose to 55% in FY09, on the back of high dayrates and increased deployment of rigs, while the NPM trebled in FY09.

To see full report: ABAN OFFSHORE