Aban continues to operate with 7 idle rigs (Aban -VII, DD-1, DD-2, DD-4, DD-5, DD-6, DD-7) with DD-8 expected to come off contract by end-Q2FY10E.
While deployment of rigs continues to be a challenge, we factor in 50% utilisation in FY10E and 85% in FY11E for the Deep Driller jack-ups.
With net debt obligation of $3.2 billion, we continue with our stance of debt restructuring, albeit at a higher borrowing cost.
Q1FY10 results came in better v/s our expectation. While revenues increased 6% y-o-y from Rs7.5billion in Q1FY09 to Rs7.9 billion in Q1FY10, net profit contracted 5% over the period, versus our estimate of 66% y-o-y decrease.
The outperformance is explained by: (a) lower expense on account of warm stacking of assets (-7% y-o-y); (b) revenues from Aban Abraham & Aban Pearl. This has cumulatively expanded operating margins 550bps y-o-y.
We see marked improvement in the tone of the large rig operators (Transocean, ENSCO, Noble) in their commentary of the jack-up environment and its outlook going forward.
While this is yet to materialise meaningfully into tenders/contracts, upward revision in budgets (on the back of higher oil prices) by E&P companies, later this year, should trigger renewed demand for offshore vessels.
We reckon oil price driven drilling regions (Middle East, Africa) would be the front runners in this recovery. Having said that, adequate supply of incremental jack-ups would keep day rates in check even as demand for these assets move up.
We are revising our estimates downward by 27% for FY10E. This factors in: (a) higher day rates for jack-ups; (b) offset by higher interest costs. Our FY11E EPS number remains unchanged.
However, our EPS number would change by 5% over FY10E-11E for every 5% change in day rates.
We raise our 12-month target price to Rs920 based on upward revision in our day rates and utilisation assumptions ahead.
Our reverse calculation suggests the CMP factors in long-term jack-up day rates of $140,000-160,000 and avg. utilisation of 85%-90% — a stretched scenario, in our view.
We maintain SELL given implied downside of 22% from current levels. Upside risk to our recommendation is speedier offshore environment recovery leading to jack-up day rate/utilisation higher v/s our assumption.