>ABAN OFFSHORE (BNP PARIBAS)

■ Management reiterated creditors backing for debt rescheduling.
■ Company to de-risk geographical concentration in Middle East.
■ Management not averse to further equity dilution to reduce debt.
■ Reiterate BUY with TP of INR1561 (7.7x FY11E EBITDA).

Strong creditors backing
There have been concerns about Aban’s ability to service its bullet payments for March 2010 and March 2012, even after debt re-scheduling. Management allayed such fears and said that Indian banks are ready to refinance loans coming up as bullet payments. Also, Indian banks are more willing to extend tenure, rather than take possession of rigs and sell them at a discount to NAV, as Aban has a predictable cash-flow-backed business.

Keen to reduce geographical concentration
Out of the 16 rigs deployed, 6 are in India and 5 in the Middle East (Iran). Management plans to diversify geographically and is reluctant to charter more than one rig in the Middle East from the four idle rigs – DD1, 6, 8 and Aban VII. Management aims to deploy three out of the four rigs by mid-FY11. Utilization rates in Latin America and South East are stabilizing with no visible pressure in spite of incremental supply earmarked for 2010/11. Management believes that rig market fundamentals are improving with E&P companies restarting long-gestation projects estimated to be viable at the current USD70-80/bbl crude price.

Further equity dilution – a risk
With operating cash flows sufficing debt repayment obligations at best, Aban has no growth plans for FY11. While no capex is guided for FY11, if rig environment continues to improve in terms of utilization and day rates, Aban plans to invest in a deepwater vessel backed by a long-term contract by FY12/13. However, until then Aban’s priority is to reduce debt levels to a comfortable 2-3x, giving comfort to creditors, mainly Indian
banks and, for the same purpose, might not shy away from raising equity.

Still steam left to play for new rig orders/de-leveraging
At CP, risk-reward looks favorable; we are comfortable owning the shares for the potential rig contracts and to play the de-leveraging story (we expect D/E to decline from 5x in YTD FY10 to 2.3x by FY12). We do not anticipate significant downside from current levels as more than 75% of the revenue is contracted until FY12. We reiterate our BUY rating and INR1,561 TP. We value ABAN at 7.7x target 2011E EV/EBITDA, in line with the global peer average on Bloomberg consensus estimates. We believe the market will cheer the potential rig contracts from current levels; we look for rig rates of ~USD125,000 for the DD series of jack-ups in line with current world average for jack-ups. Risk: Contract delays.

To read the full report: ABAN OFFSHORE