There is clear evidence of slowdown in E&P activity globally, which is likely to result in lower demand for offshore assets. Global E&P spending is expected to contract by 12% in 2009 to $400 billion from $454 billion in 2008.
We are increasingly getting wary of the failure on company part to secure contracts for four of its idle assets (one being added in Q4FY09).
With contract of another five assets coming up for termination over the next 6 months, we believe that company’s utilisations and cashflows would come under serious pressure.
There has been significant delay in the contract commencement of two of its deepwater assets viz. Aban Abraham and Aban Pearl.
Against a proposed start date of January ’09 for both the assets, Aban Abraham is currently under mobilization and is expected to commence its contract from March ’09.
Aban Pearl on the other hand is now expected to begin its contract from May ’09 (management guidance).
The company has a debt book of $3.2 billion, payment of which is expected to materialize by FY10E. Our analysis of the company’s debt structure indicates a risk of re-financing from FY10E onwards, given our lower day rate/utilization assumptions.
Lower cash flows than previously estimated, have led to a downward revision in our estimate and DCF based target price. The main factors contributing to reduced cash flows are:
Reduction in day rates by ~35% from current levels as against ~15% modeled earlier ($120,000 v/s $152,000); lower cash flows on account of delayed start of contracts with Aban Abraham and Aban Pearl and lower average utilization of ~65% as against earlier assumption of 85%.
Modeling for the above changes, our target price has been revised from Rs1600 to Rs510 per share. At the CMP of Rs420, the stock quotes at 0.7x P/BV and 4.8x EV/EBITDA our FY10E earnings.
We downgrade the stock to HOLD with a 12-month target price of Rs510, implying an upside of 21% from the current levels.