>ABAN OFFSHORE LIMITED (PRIME BROKING)

BACK WITH (A BAN)G!

WHAT’S NEW & WHAT’S CHANGED?
We are bullish on the offshore drilling industry in general and Aban Offshore in particular because of the following positive developments and changes:

1) There has been a dramatic resurgence in the demand for rigs in the Middle East and Latin American markets. We expect offshore drillers to be able to deploy their idle rigs for two-three year fixed term contracts over the next few months.

2) The contract day rates, which were expected to drop to Rs. 90K-100K have settled between Rs. 115K-125K for two-three year contracts; the day rates in the Middle East markets would be higher at Rs. 130K-140K.

3) We believe banks would reschedule debt tenors for offshore drillers to between 8 and 10 years from their current five year tenors. This is based on a similar approach by banks to companies needing debt rescheduling in other sectors. This is more so in case of Aban as it already has operational rigs and substantial cash flows from their operation.

We expect Aban to be able to deploy at least six of its currently seven idle assets by the beginning of and during the third quarter of FY10. Further, its deepwater assets – Aban Pearl and Aban Abraham – that are on long-term contracts are expected to start generating revenues beginning August 2009. We expect Aban to have deployed all its assets for FY11. Given the improvement in macro environment for offshore drilling industry and our expectation of Aban’s ability to restructure its debt, we are bullish on the stock with a STRONG BUY rating and price target of Rs. 2,091.

OUTLOOK
The global offshore drilling industry is hugely dependent on the crude oil prices. The industry suffered heavily during the second half of 2008 as crude oil prices plunged from highs of about $147 to lows of about $32. The recent strong rally in crude oil prices and the expectation of a sustained rising demand should benefit the offshore drilling industry as higher crude oil prices
make several oil & gas projects commercially viable.

It is a simplification to base the fortunes of the offshore drilling industry on the oil and natural gas prices, however, they are a key determinant of the number, length and value of the offshore drilling contracts. The demand-supply mismatches of the offshore drilling rigs being the obvious other key determinant. The graph of number of new offshore rig contracts awarded each month from
January 2008 to May 2009 – a period when oil prices have been extremely volatile – clearly establishes the importance of oil prices for the offshore drilling industry.

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