>ABAN OFFSHORE (CITI)

Upgrade to Buy: Concerns Abating, Outlook Improving

■ Upgrade to Buy — Despite the stock’s 27-29% outperformance in the last 2-3 months, we upgrade Aban to Buy (1M) from Sell (3S) with a Rs1,550 TP (was Rs520), driven by a better outlook and yesterday’s positive announcements.

■ Three key concerns abating — Our Sell rating was premised on 3 key concerns — (i) idle assets, (ii) high leverage, and (iii) E&P capex cuts — which did play out and have materially abated since then. The announcement yesterday of LT contracts for 4 idle rigs at healthy day rates provides us the necessary evidence to substantiate our earlier claim of improving times (see our note titled '1Q Ahead of Estimates – Signs of Improving Times' dated 31 Jul’09) and drives our TP, rating and risk rating upgrade. Debt restructuring (through moratorium on principal) also appears likely, largely precluding bankruptcy. The jack-up market appears to be showing signs of turning around, with crude at US$60+.

■ Duration and pricing of new contracts +ve — Aban yesterday announced deployment of 3 Deep Driller rigs in Middle East at day rates of cUS$165K for 3 years and 1 Deep Driller rig in Latam for US$120K/day for ~2 yrs. The day rates, esp. on the Middle East contract, are a +ve surprise. While political risks may have discouraged competition permitting Aban to command higher rates, Aban's presence in the region (through Aban VIII and Aban VI) reduces risk.

■ New TP of Rs1,550 — Key changes to our DCF assumptions: (i) improvement in industry outlook driving higher medium-term cash flows and slight improvement in mid-cycle earnings, (ii) terminal growth rate of 2% (vs. 0%), (iii) roll forward to Mar-10E, and (iv) earnings changes: -50% in FY10E, +19% in FY11E. Given the high debt, our equity value nearly trebles though our EV is up a more modest 46%. Our new TP imputes a 5.3x P/E and 6.7x EV/Ebitda.

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