Citigroup Global - Aban Offshore

Broking House - Citigroup Global Markets Inc
Recommendation - Buy



Capacity expanding with high level of gearing.
In its report dated 4th April 4, 2007 Citigroup Global Markets Inc (Citi) recommends a "Buy" on Aban Offshore Ltd (Aban) at its current price of Rs. 2,052 with a target price of Rs. 2,850.

Citigroup Global Markets Inc (Citi) mentions that Aban Offshore Ltd (Aban) is the flagship company of the Aban group which was established in 1986 as an Indo-US joint venture in offshore drilling. Aban is the largest offshore oilfield service provider in the private sector in India, says Citi.

Citi states that Aban''s acquisition of Sinvest has created a material, leveraged play on the tight market for offshore drilling services. Citi further adds that re-pricing of existing rigs and a significant pipeline of 9 drilling assets coming on-stream over the next 2 years will help Aban grow consolidated earnings 20.5x over FY06-FY09E.

Citi points out that Aban''s consolidated net debt of US$210 m presents a very high level of gearing given its equity base of US$65 m. Citi also initiates that gearing will come off very rapidly with strong cash flows from operations (US$130 m over FY08- 10E) and further equity infusion in the parent entity (with consequent dilution) cannot be ruled out.

Citi maintains that the capacity is expanding across all offshore asset classes, but there is no evidence that additions have exceeded demand growth. Citi forecasts E&P spending to rise by 7% in CY07, following a 26% growth in 2006. Spending plans are now building in higher long-term oil prices (US$53.7/bbl); however, sensitivity to oil price changes has declined.

Citi makes us aware that slowdown in offshore services demand growth could have a huge impact on Aban given its high gearing. Citi further states that re-pricing of 3 of Aban''s domestic rigs, due this quarter, will be a short-term trigger for the stock.

Hence, Citi raises target price for Aban to Rs2850, from its earlier price of Rs1700 based on 8x FY09E consolidated EPS, in-line with target multiples for global peers. Citi reiterates Buy, but raise the risk rating on the stock to High from Medium due to Aban''s high financial leverage.