Aban Offshore - STOCK UPDATE

Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs3,569
Current market price: Rs2,394

Concerns overdone
Aban Offshore’s management maintains its bullish outlook on the jack-up rig market. Contrary to expectations, the management feels that the jack-up rates have held up pretty well in the past few months.

As had been mentioned in our previous updates, about 34 new jack-up rigs are likely to be added globally in CY2008 followed by another 30 rigs in CY2009. This capacity expansion has led to increasing concerns of a fall in the utilisation rates for the jack-up rigs and of a subsequent drop in the day rates. However, the Aban Offshore management expects a huge demand for the jack-up rigs going forward.

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It expects requirements of 25 rigs in Iran, about 15 in Brazil and another 12 rigs in China. We, therefore, believe that the demand-supply situation in the jack-up rig market will remain tight going forward and the high utilisation level of over 90% for the jack-up rigs is likely to be sustained.