We believe the recent underperformance (12% in past three months) offers a good opportunity to invest in Aban Offshore stock. The stock has corrected by 12% in the past three months against the Sensex?s rise of 0.4% in the same period. We are surprised by the sharp correction in the stock price despite no change in operating conditions.
On the contrary, we see the recent surge in crude prices as positive for global E&P spending. This should augur well for Aban Offshore as some of its contracts are due for renewal in early CY2011E and may command a higher day-rate versus our expectation.
We see the recent sharp increase in crude oil prices as a positive for the offshore drilling services industry as it will encourage higher investments into the E&P sector, which in turn will improve the demand-supply balance for the rigs.
We expect crude prices to soften from the current high levels, but expect them to remain in a healthy range of $85-90/bbl in the near term. We note that contracts for four jackup rigs of Aban are due for renewal in 1HCY11E.
We currently assume the jackups will be deployed at 15% lower dayrates versus their existing contracts. We do not rule out upside from higher-than-expected day rates under the new contracts. We have upgraded Aban Offshore to buy from add with 23% upside to our revised DCF-based target price of Rs 915.
We note that the stock is currently trading at 7XFY2011E Ebitda and 6.4X FY2012E Ebitda. On P/E basis, the stock is trading at 7X FY2011E EPS and 6X FY2012E EPS. Key downside risks stem from debt-repayment capability. We highlight that Aban Offshore?s net debt/Ebitda ratio stands at 5.6X and 4.9X in FY2011E and FY2012E and Ebitda to interest coverage ratio is at 2.2X and 2.3X in FY2011E and FY2012E.
Kotak
