Aban is currently in the process of restructuring its debt of $3.2 billion, primarily by extending tenure of the loans from 5-6 years to 10 years.
This would in turn imply an annual debt payment run rate of ~$450 million (including Sinvest bonds).
While FY10E would require debt refinancing up to $300 million, the positive impact of the recent asset deployments would ease debt payment concerns by FY11E. We expect the company’s debt/equity to improve from 12x in FY09E to 4x by FY11E.
The recent contract, beginning Q3FY10E, for deployment of four of Aban’s idle jack-ups (out of seven), would, we reckon, improve the company’s cashflow visibility going forward.
Contracted at an average day rate of $155,000 (net of taxes) for a period of 2-3years, these deals would imply an incremental addition of $140 million to the company’s EBITDA on an annualised basis.
Underpinned by our interaction with industry sources, we also model for further deployment of two jack-ups at a day rate of $135,000 starting mid Q3FY10E on terms similar to the recent contracts.
We are revising our FY11E estimates upward by 38% to factor in: a) higher day rates/utilisation for the jack-ups; b) lower operating cost driven by termination of contract with Premium Drilling (managing and operating DDs). This has been partly offset by increase in our interest cost from 5.5% to 7% on the foreign denominated debt.
We note a marked improvement in the tone of the large rig operators (Transocean, ENSCO, Noble) in their commentary on 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 that oil price driven drilling regions (Middle East, Mexico) would be the front runners in this recovery.
Having said that, a considerable supply of incremental jack-ups will keep day rates under check even as demand for these assets move up.
We raise our target price on Aban from Rs920 to Rs1,470 (DCF-based) in the wake of placement of four jack-ups (deep driller series) at day rates/utilisation significantly higher than our expectation.
Commensurate with our increase in target price, we revise our recommendation from Sell to BUY. At the CMP of Rs1,200, the stock is trading at 1.2x P/BV and 5.2x EV/EBITDA FY11E earnings.