Aban Offshore Ltd. - Higher Oil Prices will benefit

No. of equity shares – 3,78,02,300
Face Value – Rs. 2
Promoter holding – 60.83%
General Public holding – 19.55%
Book Value – Rs. 187
Reserves – Rs. 700 Crore
52 week high/low – Rs. 2835 /Rs. 224

Aban Offshore Limited offers a diverse range of offshore drilling services to clients in India and abroad.
**Exploratory services
**Drilling services
**Production of hydrocarbons
**Manning and management

Order Book:
The company has 162 rigs in the order book, of these 84 uncontracted rigs, 44 are being delivered over the next 2 years. Out of these 44, 40 of them are jack-ups (91%). Thus, pressure on day-rates would be restricted to jack-ups due to increased supplies in this segment. A majority of new deepwater assets are contracted for long-term, and will not be available for a few years going forward. We, therefore, expect day-rates for deepwater assets to remain relatively strong.

Valuations:
At current price of Rs 920 the stock is trading at P/E of 13 x TTM EPS of Rs.67.62 and it is trading at TTM EV/EBITDA of 5.65x.

Recent Developments:
Aban Offshore stock has gained around 40% in last few trading sessions. And has risen from year low of Rs. 224 made on 9-Mar-09. The reason for the move over the past couple of months has been the rise in crude oil prices. According to a Morgan Stanley report, the outlook for the offshore jack-up industry is improving with crude oil prices rising from $40 per barrel to $60 currently.
That is expected to result in higher rig rates and more contracts for the company. Already, oil services companies are understood to be seeing better demand across the globe and it could mean that at least three of Aban’s seven idle rigs will be deployed in the near future.

Also, with credit markets easier than they were even six months back, there is a higher probability that Aban will now be able to restructure its financials.

The company needs to strengthen its balance sheet and bring down the debt-equity ratio from around 9. As Morgan Stanley points out, Aban can do a placement
of shares to institutional buyers and also restructure its $3-billion foreign currency debt. Aban is required to pay off a small part of its borrowings by the end of the year, after which repayments at regular intervals include bonds due for conversion in 2012.

Improving cash flows from operations would also help. Aban is expected to report losses for the first half of 2009-10 with many of the firm’s assets remaining unutilized. However, things should improve with most of the company’s assets expected to be deployed by the end of 2010-11.

The company is expected to turn in revenues in the region of Rs 3,400 crore in the current year, while operating profits are expected to come in close to Rs 1,910 crore. These figures are almost 3 times as that of FY-09.

Concerns:
Currently 7 out of 13 rigs of Aban Singapore , Aban's wholly owned subsidiary are sitting idle and two more rigs are about to complete their contracts by June and Sept 2009. These rigs have revenue generation capability of close to USD 400 mn and their idle status is severely impacting Aban cash flow generation capabilities.
On a consolidated basis Aban needs to retire about USD 435 million or 13.4% of its USD 3.2 bn debt in FY2010. Out of this USD 142 mn will be maturing on 22 Dec 2009 to honor the bullet payments of Norwegian Kroner bonds on book of its subsidiary Sinvest (which in turn is a 100% subsidiary of Aban Singapore).
On the back of recent rally in crude prices, we now expect the day-rates for jack-ups to remain stagnant at current levels for another 2 years.

Industry Scenario:
An offshore platform, often referred to as an oil platform or (somewhat incorrectly) oil rig, is a large structure used to house workers and machinery needed to drill wells in the ocean bed, extract oil and/or natural gas, process the produced fluids, and ship or pipe them to shore. Depending on the circumstances, the platform may be fixed to the ocean floor, may consist of an artificial island, or may float.
Most offshore platforms are located on the continental shelf, though with advances in technology and increasing crude oil prices, drilling and production in deeper waters has become both feasible and economically viable. A typical platform may have around thirty wellheads located on the platform and directional drilling allows reservoirs to be accessed at both different depths and at remote positions up to 5 miles (8 kilometers) from the platform.
Remote sub sea wells may also be connected to a platform by flow lines and by umbilical connections; these sub sea solutions may consist of single wells or of a manifold centre for multiple wells.

Demand for global exploration and production (E&P) capex to ease in medium term; long-term trajectory intact: Global E&P capex, the key demand driver for oilfield services (OFS), is partly correlated to crude price movements and crude demand. Global E&P capex is likely to pick up going forward with a revival in crude prices. However, the long-term demand trajectory for OFS is likely to remain firm as mature field decline rate increases and rising project complexity and ageing global offshore/onshore infrastructure necessitate committed E&P capital spending.

New supply in many sub-sectors to ease pricing:
New supplies in most sub-sectors like jack-up rigs, offshore supply vessels, US onshore rigs, and offshore seismic streamers ( capacity to double) are likely to come on-stream through CY08- 11E. On the other hand, already booked new supply of floaters indicates expected tightness in the market. Over the long term, though shipyard capacities are likely to ease (due to global weakness), weak new order booking is expected to give some respite to the long-term supply situation.

Domestic OFS an emerging opportunity; medium-term headwinds: Unexplored frontiers, restricted equity access to global reserves (making Indian E&P attractive), and significant New Exploration Licensing Policy (NELP) commitments (USD 21 bn for NELP-I to VI), present an emerging opportunity for Indian OFS. Hence, domestically-driven companies and sub-sectors (onshore drilling, and engineering and construction), whose pricing is not fully driven by global industry dynamics, are likely to fare well. However, the medium term demand-supply scenario is expected to impact rates of Indian offshore drillers and OSV companies. Onshore seismic is likely to provide moderate growth opportunities.

Company has written off Rs.150 crore in Q4 FY09 on account of impairment charge. As of FY2008 the unamortized capital expenditure for Murmanskaya was Rs150 Cr which should have been charge off over the remaining period of the lease (19 months up to November 2009) implying a quarterly charge of around Rs 24 Cr. However, the company did not provide for this in the first nine months of FY2009 and charged the entire amount in 4QFY09 since the rig is not expected to get a contract anytime soon.

Financial Analysis:

Higher sales – Aban off shore reported Q4FY09 revenue of Rs 774 Cr, an increase of 17% y-o-y. The operating profit margin (OPM) expanded by 480 basis points to 55.7%. Gained by higher sales and jump in the OPM, operating profits increased 29% to Rs 431.31 Cr. (Consolidated performance as per Indian GAAP)

Operating performance – EBITDA of Rs.431 Cr increased by 29% y-o-y but down by 9% q-o-q. Revenues were impacted by: (i) jack-up DD 7 lying idle during the quarter, and (ii) drillship Aban Ice being dry-docked during the quarter. While 1Q EBITDA should recover with commencement of contribution from drillship Aban Abraham, this could be partly offset by higher capital costs on the same.

Impairment and interest cost result in net loss: Aban reported net loss of Rs93.08 Cr in 4QFY09. The company provided Rs150 crore for the impairment of the capital expenditure incurred on the rig Murmanskaya which has been taken on bare-boat charter. Interest cost for the quarter was Rs225.8 Cr this was mainly on account of increase in the high cost loans raised at the parent level to replace debt at Aban Singapore.

Risks:
Falling crude prices is a concern for the company.
Idle Rigs lying affect the cash flow and also the deployment of regs at lower rates could affect the profitability.