>Asia Energy: Getting Bullish on Oil Services (MORGAN STANLEY)

■We are becoming incrementally positive on offshore drillers, key being our positive view on the jackup market. We expect utilization for international jackups, currently under 80%, to reach significant levels of 85% by mid-year and 95% by year-end. We expect E&P capex to increase substantially in next few years, and hence highlight two stocks to play on our bullish view on offshore drillers:

1) COSL is our preferred play on E&P capex with China, with strong earnings growth for the next five years. We expect COSL to spend US$2 bn in the next two years; add eight more jackups and three more semis. COSL has exposure in the offshore China region, and in the overseas offshore market following the acquisition of Awilco.

2) Aban has deployed twelve of its sixteen jackups with long-term contracts of one to three years. Increased utilization rates due to rising E&P capex should be a positive, as it increases the probability of idle assets deployment and increases the efficiency of currently deployed assets. Anan currently has four idle jackup assets and three coming up for redeployment in F2011 and F2012. We believe Aban will be able to deleverage its balance sheet through diluting equity. We expect the pain of debt repayment to subside for the next two years, and believe Aban will be able to service its debt with operational cash flows.

■ We have marked to market our refining margin assumptions for Q110 to $5/bbl from $3.5/bbl, thereby increasing our 2010 full-year estimate by 10% from $3.7/bbl to $4.1/bbl.

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