Sharekhan keeps HOLD on Aban Offshore

The consolidated revenue grew by 40.1% to Rs837.1 crore in Q3FY2009 on account of a stronger dollar, better deployment of assets and re-pricing of some of its rigs at higher rates in the previous couple of quarters.

The operating profit margin (OPM) improved by 340 basis points to 56.4%, though we had expected a greater improvement in the margins. Consequently, the operating profit grew by 49.1% to Rs471.8 crore.

With steep fall in crude oil prices, exploration and production (E&P) spend across the globe is likely to get pruned, which will lead to fall in day rates for rigs.

Our topmost worry for the company is the idle status of four of its assets, namely Aban VII, Deep Driller 6, Deep Driller 7 and Murmanskaya.

Moreover, contracts for about five of its assets are coming to an expiry in the next six months, and both re-pricing as well contract renewal risks also remain for these rigs.

The company also lost out on some of the big tenders of ONGC recently to its peers, which in our view is a big negative.

Valuation

On account of delay in the deployment of key assets and the absence of contracts for its idle rigs, we are reducing our earnings estimate for FY2009 and FY2010 by 32.4% and 18.1% respectively.

At the current market price, the stock is quoting at 2.4x and 1.2x its FY2009 and FY2010 earnings estimates respectively. Based on our DCF-analysis, we have arrived at a value of Rs750 for the stock.

Though this presents an upside of about 75% from current levels, more negative surprises relating to deployment of assets could further affect the cash flow and the ability to service and repay debt.

Based on these uncertainties, we are recommending a HOLD on the stock.

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