Friday August 28, 05:10 PM

BUY OR SELL- Aban Offshore: Contract win or debt woes?

By Swati Pandey

MUMBAI (Reuters) - Shares of drilling firm Aban Offshore gained 29 percent in two sessions after it won long-term contracts worth $695 million but analysts are still cautious as it continues to be saddled with debt.

In the seven months to July, the stock fell over 3 percent, hitting a low of 224.1 rupees in March. The 30-share benchmark BSE (^BSESN : 16632.01 -222.92) index jumped 39 percent in the period.

However, it has risen over 130 percent since mid-July amid market talk of contracts won, analysts said.

NEW ORDERS PROMPT BUY

Eight brokerages covered by Thomson Reuters have a 'buy' rating while two have rated it as 'outperformer', data showed.

Citigroup, Credit Suisse, Religare Enterprises, JM Financial Institutional Securities, Anand Rathi Securities upgraded their ratings on Aban to 'buy' after the announcement.

"Four of the 7 rigs have been deployed. So, there will be cash for repayment of debt. Cash flow position has definitely improved for the company," said Piyush Parag, a sector analyst at Religare.

The rigs have been placed at higher-than-expected day rates and for longer durations while nearly two-thirds of its consolidated debt is to be restructured, Citi said in its Thursday report, citing reasons for upgrading.

Also, prospects for drilling services have brightened with crude oil breaching $70, lending impetus to exploration and investments in the sector, analysts said.

This is a marked change from the start of the year when most brokerages had rated it as a 'sell,' citing its debt.

The firm posted an 11 percent rise in net profit to 795 million rupees for the April-June quarter on a 17 percent rise in net sales to 2.9 billion rupees, according to data on the National Stock Exchange (^NSEI : 4941.75 -63.8).

Nine out of 22 brokerages whose estimates are covered by Reuters changed their rating on Aban after the drilling firm announced the two contracts it signed for deploying four rigs.

TOO PRICEY?

The soaring share price and the huge debt component has left some analysts cautious. Aban has about $3 billion consolidated debt, according to Citi.

"The stock is quite overpriced. The recent rally, we saw since July, doesn't make any sense. Its debt is 11 times equity and there is still not much clarity about its rigs," said Kunal Lakhan, analysts at brokerage KR Choksey Shares & Securities.

KRC has lowered its investment rating to 'sell' on Aban citing concerns about the company's heavy debt position and pricey valuation. It expects nearly a third correction in the value of the shares.

Four analysts have a 'sell' rating on Aban while two have an 'underperform' rating', according to Thomson Reuters data.

By FY12, the firm will still have a debt-equity ratio of 4:1, which is not a financially stable level for the long term, said Ajit Motwani, analyst at Emkay Shares & Stock Brokers.

"The company is still burdened with high interest costs. For me, 1,000-1,100 rupees is a good level," added Syed Sagheer, analyst with Pinc Research.

(For more news on Reuters Money click http://in.reuters.com/money)