Recovery in oil prices results in increased utilization rates for jack-up rigs
Crude oil prices have recovered from US$30/bbl to about US$80/bbl within a period of eight months. The recovery has been on back of increased estimates of crude oil demand for CY09 and CY10. E&P players had put on hold their exploration commitments following fall in crude oil prices, especially in deep water blocks. However, with crude oil prices now substantially above the break even level for deep water blocks, demand for jack-ups is firming up. Resultantly, utilization of rigs has been on rising trend in the recent past.
Revenue visibility strong with only three rigs currently idle
During Q2 FY10, Aban Offhsore Ltd (AOL) contracted six vessels on long term basis, leaving only three of its rigs currently under marketing. This has translated into strong revenue visibility for the near term. 100% of H2 FY10 and 75% of FY11 projected revenues are from the existing contracts. Going ahead, with improvement in demand environment, we expect close to 95% utilization levels for AOL’s fleet in FY11.
Equity dilution or sale of assets imminent for debt repayment
During FY11, AOL has a commitment to repay US$410mn worth of debt. We expect the company to generate Rs20bn worth of cash profits in FY10, which should take care of debt repayment. However, considering increase in business activity we expect higher working capital requirement resulting in strained overall cash-flows. Hence, we expect the company to raise funds either through equity dilution (QIP issue) or sale of assets. At our target price, we expect about 10-15% dilution in equity, if the company raises about US$200mn through the QIP issue.
Steep discount to global peers not justified, recommend BUY
AOL is currently trading at P/E multiple of 4x, its FY11E earnings of Rs316. However, global average of major players is currently at 10x 2009 and 8x 2010 earnings. Considering, AOL’s highly leveraged balance sheet, a discount is warranted. However, we believe the 50% discount is unjustified in the light of improving demand environment. We value AOL at 6x FY11E earnings (25% discount to global average) yielding a target price of Rs1,740. Recommend BUY.
| NIFTY 
