Aban Offshore Ltd

Increased E&P investments warrants strong demand for rigs Crude oil prices have sky rocketed from US$25/bbl in 2002 to US$135/bbl today.
The humongous run up has been on the back of rising demand especially from emerging economies. With no new major discoveries over the last few years, the reserve accretion rate has slumped below 100% mark. This has warranted huge commitments towards E&P activities leading to burgeoning demand for rigs.
Rig rates to remain strong on firm operating rates Between 2005 and 2007, day rates for rigs have more than doubled. With demand for rigs increasing, shipyards have been booked with rig construction orders for the next three years. This has caused acute shortage in availability of EPC contractors causing delay in rig deliveries. The demand is also fueled by ageing of rigs, which now need replacements. Supplies are lined up over the next three years, but delays in delivery would enable the industry to absorb the supply and keep operating rates at higher levels. This will lead to further increase in day rates. Aban well poised to leverage on industry dynamics
Aban Offshore Ltd (Aban) has been a key player in the Indian offshore rig market. With the acquisition of Sinvest, it has entered into the big league of international players and will now have a global presence. Along with Sinvest, it will have 22 rigs by the end of FY09. Recently, Aban has been able to take substantial hikes in day rates and six more assets are due for renewal in the next 10 months. Also, addition of assets to the fleet will fuel volume growth.
Attractively valued compared to international peers Historically, Aban has clocked the highest operating margins in the industry at a global scale. Further, the growth rate expected for Aban over the next couple of years is higher than most of its peers. Our estimates are based on current day rates existing in the market. With strained demand supply scenario for rigs, upsides to our estimates cannot be ruled out. Also, listing of the Singapore subsidiary could unlock value for the company. At CMP of Rs4,047 the stock is trading at a P/E multiple of 8.1x and 6.9x FY09E and FY10E respectively compared to international average of 12.6x and 10.5x on CY08E and CY09E. We believe the stock should trade at 9x FY10 estimated earnings of Rs583. We recommend a BUY with a target price of Rs5,247, an upside of 29.6%.