Aban Offshore - Discounted charter rate but better utilisation... - ICICI direct

Aban Offshore (Aban) has secured a contract for deployment of jack up rig Deep Driller 3 in Malaysia from Petronas Carigali for a firm period of three years. The estimated revenue from deployment has been pegged at $152.75 million (equivalent to Rs.800 crore). Aban Offshore had seven contracts due for renewal in H2FY13, which belong to the younger generation of the fleet. Rig DD3 is a 2006 built 350/35000 (water depth/drilling depth in feet), which was deployed in Malaysia. The day charter rate at which the rig DD3 has been contracted is at ~ 15% discount to the preceding rate on account of subdued global charter rates. However, increase in revenue due to better utilisation coupled with improved visibility provide scope for upgrading FY14E P/BV multiple to 0.7x from 0.65x. We maintain HOLD rating with a revised target price of Rs.431.

Subsequent renewals critical to revenue visibility

This was the first from the series of seven assets up for renewal in H2FY13. Though the contracted charter rate is at a discount (~15%) to the preceding rate, we believe better utilisation and improved revenue visibility will provide a cushion to the cash flow. Currently, Aban has six assets under renewal of which three are deployed in the Middle East, two in India and one in Mexico. Globally, charter rates for rigs have tapered down. However, the utilisation rate for drill-ships and jack up rigs continue to remain quite high at 90% and 82%, respectively.

Refinancing to ease cost pressure

We expect Aban's debt-to-equity ratio to remain at 4.26x in FY14E. Interest cost as a percentage of EBITDA is expected to remain high at 56% FY13E and 55% FY 14E, pressurising the bottomline. Ongoing plans to refinance rupee loan (at interest rate of 13-14%) are likely to bring down the interest cost in the range of 7-7.5% leading to cost saving.

Better utilisation provides scope for re-rating

Charter rates for DD3 are at a minor discount to the preceding rate. However, low mobilisation cost, better utilisation and improved revenue visibility provide cushion to the cash flow. Going forward, we expect utilisation to remain at par with its global peers. This warrants a re-rating of our target multiple to 0.7x (earlier 0.65x) FY14E book value (35% discount to global average of 1.1 P/BV for global offshore companies). We maintain our HOLD rating with a revised target price of Rs.431.

Source : Equity Bulls

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