Aban Offshore - Lower rig utilisation dents earnings - Edelweiss

Aban Offshore's (Aban) Q2FY13 consolidated revenue at INR9.5bn was lower than the estimated INR10.1bn owing to lower-than-expected rig utilisation. PAT at INR492mn was sharply lower than the INR1,033mn estimate due to higher operating expenses and high leverage. Cost of funds dipped from 8.9% to 8.4% in H1FY13 even as debt has risen by ~USD200mn. Though the rig market is improving, an ageing fleet, renewal at lower day rates and high leverage (D/E of 4x) will keep cash flow to equity in check. Further, four rigs deployed in Iran expose the firm to payment issues amid tightening sanctions. We marginally reduce EBITDA estimate 3%/4% for FY13/14 due to lower rig rates. Maintain 'REDUCE' with a target price of INR373.

Renews DD-3 at a lower rate; six contracts up for renewal in FY13

Aban has inked a contract with Petronas Carigali to deploy jack-up rig Deep Driller 3 for three years. However, the rate is USD140,000/day, lower than the earlier rate of USD165,000/day. While Tahara FPU remains non-contracted as of now, the company has contracts for six rigs expiring in rest of FY13, of which three are deployed in Middle East and one in Mexico. Though Aban expects to renew these with existing operators, the renewed rates could be lower in some cases due to geopolitical risks and an ageing fleet.

Higher operating expenses lead to lower EBITDA

Apart from lower rig utilisation, operating expenses were high as a result of deployment of rigs Aban-7 and DD-7 in the quarter, leading to INR4.9bn EBITDA, lower than the estimated INR5.7bn. High operating leverage led to PAT of INR492mn, sharply lower than the estimated INR1,033mn.

Outlook and valuations: Debt reduction key; maintain 'REDUCE'

While Aban's interest cost dipped in Q2FY13, it has surged 140bps over the past two years and is 60% of EBITDA. Further, the company has extended the maturity of INR1,050mn of 8% preference shares by three years and raised the coupon to 10%. With D/E high at 4x, an ageing fleet and risk of payment issues in Iran where four rigs are deployed (~30% of revenue), improvement in FCFE is some time away. Maintain 'REDUCE/Sector Underperformer' with target price of INR373.

Source : Equity Bulls

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