>ABAN OFFSHORE LIMITED (CITI)

Alert: 1Q Ahead of Estimates – Signs of Improving Times?

■ 1Q ahead of estimates — Aban reported a 1QFY10 PAT of Rs1.1bn (-10% yoy) vs. a loss in 4QFY09. PAT was ahead of our estimates driven by: (i) better than expected EBITDA margins, (ii) marginal improvement in revenues (+3% qoq), with mobilization revenues from Aban Pearl offsetting the decline in revenues from 6 Deep Driller going idle, and (iii) lower depreciation charge with jack-up Murmunskaya being returned in 4QFY09. EBITDA of Rs4.7bn (+17% yoy, +9% qoq) was also slightly ahead, although in line with 2Q/3QFY09 levels.

■ EBITDA margins improve; D/E at 10x, but could get restructured — Improvement in EBITDA margins (59% in 1QFY10 vs. 53-56% over FY09) was driven by lower costs on account of discontinuation of the Premium Drilling contract (for managing and operating the DD rigs), commencement of Aban Pearl, and warm stacking of some of the DD rigs. Recent press reports (source: NDTV, DNA) have suggested that Aban’s consol debt of US$3.3bn could get restructured, which combined with a market that is showing signs of turning around, could ensure its continued operation despite the uncomfortably high 10x D/E.

■ Jack-up market turning around? — Signals are mixed. US driller Noble Corp noted that “signs of life” are showing in the market, after clinching a contract extension in West Africa at US$115K/day, and also that a sharp drop in drilling costs have opened up opportunities for oil majors to lock in jack-ups for multi-year contracts. However, Hercules Offshore noted that international markets are still weak with current utilization rates at ~80% and day rates may come under pressure into 2010, while Pride International does not see the recent up-tick in international shallow/mid-water tendering as a prelude to recovery given sizeable newbuild
overhang.

■ Potential opportunities in India, Middle East, Mexico — ONGC has issued one tender for three 300’ independent leg jack-ups for renewal of three rigs for a period of five years. In addition, Pemex may launch one or two tenders for two 500’ plus jack-ups, and four or five 300 foot commodity jack-ups. Press reports (NDTV, DNA) have also suggested that Aban could be exploring contracts from Middle East. Although political uncertainty could be a hindrance for many drillers, Aban already operates two jack-ups there viz. Aban VI and VIII. While the developments appear encouraging and reward of contracts (preferably multi-year) could be
positive, we view the stock is largely already pricing these in. Maintain Sell.

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