Goldman Sachs: Aban Offshore (ABAN.BO): Re-financing by Dec the key issue; E&P capex outlook stays grim

Goldman Sachs: Aban Offshore (ABAN.BO): Re-financing by Dec the key issue; E&P capex outlook stays grim

Coverage View: Cautious
Rating: Neutral

What's changed:
Aban needs to re-finance about US$169mn of existing debt in FY10E, and US$148mn out of that before Dec’09 in order to honour the bullet payments of Norwegian Kroner (NOK) bonds (from Sinvest) maturing on 22 Dec 2009. This has become the key issue for the company since we believe Aban has limited options to raise finance by other means in the current environment. Moreover, four of Aban’s assets are currently lying idle owing to major cutbacks in E&P capex globally. Another four of Aban’s assets will be coming out of contracts in the next six months, increasing the risk of lower utilisation of assets and pushing up the amount of re-financing needed.

Implications:
We believe that Aban stock is now effectively a binary option, with part of the street viewing that Aban’s cash flows will weaken to a point where refinancing will look difficult. We, however, believe that it is possible that Aban will get re-financing, though this could be expensive in the current environment. News-flow on this remains critical for re-rating of the stock.

Valuation:
We retain our Neutral rating with a new P/B-based 12-month target price of Rs475 (Rs800 earlier), implying upside potential of 8%. We have cut our FY09E-11E EPS by 30%-40% following the 3Q results and building in (i) lower utilisation rates and (ii) lower day rates. At current levels, Aban looks inexpensive on P/E vs. regional peers though not very cheap on EV/EBITDA owing to high debt levels.

Key risks:
1) Re-financing risk in 2009E, (2) further delay in deploying idle assets; 3) renewal of contracts for other assets at day rates lower than our estimates; 4) delay in the deployment of new-builds; 5) further news flows on lower E&P capex; and 6) poor disclosures in quarterly results.