BNP Paribas Securities recommends Aban Offshore

BNP Paribas Securities recommends Aban Offshore

Aban is actively looking for contracts for DeepDriller6, DeepDriller7 and ABAN VII. We believe the contract dayrates and durations will determine the outcome of the other contracts that come up for renewal in H109.

We believe if Aban is able to place the rigs under long-term contracts, it will be a key positive for the stock. Market perception about Aban’s ability to lock-in long-term contracts is fast eroding, which is evident from the sharp sell-off in the shares.

In addition, the company’s ability to service its loans as well its interest is also being questioned amid a global oil price slump.

We would be buyers of the stock in light of the possible new contracts and the fact that shares have seen a sharp sell-off.

We believe there are significant catalysts in the near-term that will result in a stock re-rating. In case of long-term contracts, investors will appreciate the revenue and cash flow visibility that will ease most of the above-mentioned concerns.

Currently 64% of Aban’s revenue is contracted until FY12; new long-term contracts will further increase the contracted revenue base and enable Aban to ride out a possible downturn in the exploration business.

Aban’s jack-up DD4 twelve-month contract was recently extended by six months at a day rate of $200,000/day. The current contract has another six-month option that we expect will be exercised.

While the current contract rate is a positive for Aban, we will be eager to see the contract rate and duration for DD6 and DD7.

We maintain our BUY rating on Aban while reducing our target price to Rs912/share from Rs2,614.

The reduction in target price is entirely driven by our estimates cut. For Aban’s un-contracted DeepDriller rigs, we assume day-rates of $150,000 and utilisation of ~80%.

With revised estimates, our FY10 EPS goes down by 6% (as 68% of FY10 revenue is contracted) while we reduce our FY12 EPS by 36% (34% contracted).