Preamble Page 3. Summary Financials & Call Page 4. Indian Offshore Market Page 17. Aban Offshore Limited Page 20

Transcription

1 26th June 2008

2 Index Index Preamble Page 3 Summary Financials & Call Page 4 Valuation Argument & Methodology Page 5 Sector Overview Page 8 Global Rig Economics Page 13 Offshore Support Vessels Page 16 Indian Offshore Market Page 17 Aban Offshore Limited Page 20 Garware Offshore Services Limited Page 30 Great Offshore Limited Page 39 SEAMEC Limited Page 50 2

3 Preamble Indian Offshore Sector Consider this. The odds for an oil exploration company to identify presence (seismic surveys, etc.) of any oil / gas / hydrocarbons at a given location is say 40%, the success rate to actually locate these would be say 20% and the likelihood of the company to commercially exploit these resources is say 25%. Then the overall probability of an exploration company actually realizing cashflows from the entire endeavour = 0.40 x 0.20 x 0.25 = = 2% only. This is the biggest frailty & vulnerability in the exploration business. But then its essentiality (critical demand so, need to spend) & the economic viability (given the increasing prices willingness & ability to spend) drive the efforts of these upstream companies. This contrasting nature of two sides of the coin is what makes the position of many offshore plays (rigs, support vessels & other services), extremely strong. However, the buoyant day rates enjoyed by the offshore assets are not just a function of the demand desperation. Expected supply of the respective vessels would play a more critical role to determine the short to medium term equilibrium. We understand that the demand for oil is expected to increase at 2% annually and would necessitate a 7.5% 8.5% increase in supply of rigs & offshore vessels. A little math suggest that based on the current orders, the incremental annual supply in the foreseeable future would be ~2% for rigs & ~5% for offshore vessels; still much lower than the incremental demand. We see the sector to remain into limelight for some more time. In the longer run, we believe that the economics of this business to be too attractive, not to entice more investments into such offshore assets. Therefore an opinion based on relative valuation would be unaffected & therefore inappropriate; and a prolonged valuation methodology like DCF would be able to reflect the correct impact & hence is a more suitable option. We have tried to analyse & differentiate a few key players in the Indian Offshore space, on various operating & valuation parameters. We have compared these companies on a number of relative considerations like P/E, P/BV, EV/EBITDA and also DCF. We prefer DCF over relative valuation options as the performance of each of these companies in any specific year in the near foreseeable future is impacted by many case-to-case factors and finally the ultimate net profit may not be reflective, that of a sustainable one. The issue of terminal value for an offshore asset due to its limited life has been taken care through assumptions on replacement capex over maintenance capex. Also the high visibility on account of the long term contract rates merit the use of DCF over other options. Aban Offshore is our top pick with a 47% upside. It's WACC is much lower at 10.1% (lowest in all 4, on account of its high leverage & higher taxation for rigs) as compared to our assumed/desired discounting rate of 13%. Apart from this little conservatism, we also feel good that ~47% (highest in all 4) of our DCF value comes from the explicit period of FY09E-13E. Importantly, Aban is also better on other parameters like P/E (5.4x FY10) & EV/EBITDA (5.3x FY10). Garware is our next best investment proposition. For Garware, the DCF valuation remains constrained on account of the capital investment in the current year. As the negative impact of this would dilute in the near future, we feel that the scrip could go to Rs. 210 generating a decent annualized upside from the current levels. We recommend a Buy on the stock. We are optimistic on Garware on three fronts improving business mix with increasing share in the highly profitable Platform Support Vessel (PSV) segment, the clever self financing deal for the new asset additions and the unfactored possibility of multiple non-fund based revenues to chip in. Great Offshore, we believe is fully priced in at the current levels. However, if it is able to get hold of even one of the high end rigs from Sea Dragon, it would add ~ 46% to its current intrinsic value and deliver exciting return on annualized basis. People willing to take bets may Buy now, while others should act on more clarity on this front. Poor CY08 to be followed by an outstanding CY09; but we feel Seamec is still avoidable. At the end, its 'ABANdance in deficit'! Aban has neither any ensuing capex to constrain the DCF valuation (like in case of Garware), nor is dependent on any event (like that in case of Great Offshore). 3

4 Summary Financials & Call Indian Offshore Sector Aban Offshore Limited CMP Rs. 3,006.0 Recommendation : BUY Target Rs. 4,426.0 Particulars (Rs Mn) FY06 FY07 FY08E FY09E FY10E FY11E FY12E Total Revenues 4, , , , , , ,898.1 PAT (140.0) 2, , , , ,245.0 EPS (Rs.) 22.3 (3.8) P/E (x) (791.9) P/BV (x) EV/EBITDA (x) ROCE (%) 12.6% 2.9% 8.7% 22.8% 25.9% 25.7% 25.5% RONW (%) 19.1% -2.6% 25.6% 69.4% 51.1% 36.9% 29.5% Note: FY08E is first consolidated year with Sinvest. Garware Offshore Services Limited CMP Rs Recommendation : BUY Target Rs Particulars (Rs Mn) CY05 CY06 FY08 # FY09E FY10E FY11E FY12E Total Revenues , , , , ,574.5 PAT EPS (Rs.) P/E (x) P/BV (x) EV/EBITDA (x) ROCE (%) 6.7% 7.7% 11.2% 12.6% 16.0% 15.5% 14.1% RONW (%) 12.1% 13.4% 14.7% 20.3% 27.3% 22.5% 18.6% # 15 months Great Offshore Limited CMP Rs Recommendation : HOLD Target Rs Particulars (Rs Mn) FY06 FY07 FY08 FY09E FY10E FY11E FY12E Total Revenues 3, , , , , , ,142.6 PAT , , , , , ,356.6 EPS (Rs.) P/E (x) P/BV (x) EV/EBITDA (x) ROCE (%) 13.6% 14.6% 14.5% 16.2% 19.5% 23.0% 21.9% RONW (%) 19.4% 23.5% 22.7% 22.2% 21.0% 21.7% 18.5% SEAMEC Limited CMP Rs Recommendation : SELL Target Rs Particulars (Rs Mn) CY06 CY07 CY08E CY09E CY10E CY11E CY12E Total Revenues 1, , , , , , ,825.6 PAT (31.3) EPS (Rs.) (0.9) P/E (x) (144.7) P/BV (x) EV/EBITDA (x) ROCE (%) 25.3% 14.8% 2.4% 24.3% 12.9% 10.0% 14.6% RONW (%) 24.5% 13.5% -0.4% 24.2% 12.6% 9.5% 13.9% 4

5 Valuation Argument & Methodology Indian Offshore Sector Analysis of the Business Model The business of rigs & offshore support vessels is like a medium to long term charter hire. While the day rates (revenues) have been on an upswing, driven by the demand-supply gap, the opex (operating expenditure) has also grown steadily on account of inflation and increasing manpower costs. Fixed Assets/Vessel Costs are generally written off over the useful life of the assets, which is over 35 years for rigs and ~25 years for other offshore vessels. Interest is a function of leveraging, which is generally high for these companies. Offshore companies, unlike shipping companies find strong favour from the lenders on account of the long-term steady nature of the business & higher visibility. Taxation on business income is negligible as the offshore vessels qualify for tonnage tax benefit. However, rigs do not get this advantage & ergo the profits from rig operations are subjected to normal tax. Aban Offshore is solely focused on rigs and therefore is subjected to higher tax rates. However, much of its business is now coming in from its Singapore subsidiary, which enjoys some tax sops there and the overall taxation impact on the company is therefore moderated. All the companies have a track record to plough back much of the earnings for future fleet expansion. The one element which brings in some disruption to the otherwise very steady-state business is dry docking. These are major repairs & overhauls which mandatorily needs to be done once in every two years. There is a double impact on this front as there are no revenues earned during this downtime & there is a lumpy addition to the overall expenditure. The best way to analyse & differentiate each of the companies in the segment would be to understand the assets/vessel dynamics. Asset Payback Period is best reflective of the earnings & profitability of the vessel, other things remaining status quo. In reality, the expected changes on future cash flows would dilute the impact of this methodology. We present a general comparative of the asset payback period for various type of the vessels. Asset Payback Computations (Rs. Mn) Jack up Rig Drill Ships Semi-Subs AHTSV MSV PSV Barge Revenues 2, , , OPEX , , Its not just profitability; investments also matter. Economics for PSVs, Jack ups, Drill Ships & Barges are superior as compared to Semis, MSVs & AHTSVs Payback captures margins and also return on investments. EBITDA 1, , , EBITDA Margin 75.0% 71.4% 73.3% 70.0% 46.2% 80.0% 76.0% Depreciation EBIT 1, , , Interest PBT 1, , , Tax PAT , , Cash PAT 1, , , CEPS Margin 41.9% 39.6% 38.3% 46.1% 30.2% 56.9% 43.7% Capital Cost 7, , , , , ,000.0 Payback (Years) ROE (%) 40.8% 38.0% 25.0% 23.5% 22.9% 34.5% 39.1% ROCE (%) 24.1% 22.9% 16.9% 12.8% 12.6% 16.2% 23.4% Note: Dry Docking ignored Aban is well placed being a rig-play entirely. Garware is a play on improvization as the business mix changes more & more in favour of more proifitable assets like PSV & Barge. 5

6 Indian Offshore Sector Working Capital Comparative The underlying table gives a reflectrion of the working capiatl intensity of the business. We observe that Great Offshore stands out with least blockage of funds in the system. Working Capital Cycle (No. of Days) Companies Inventory Debtors Loans & Advances Creditors Net Working Capital Aban Offshore Ltd Garware Offshore Services Ltd Great Offshore Ltd SEAMEC Ltd Event Plays exist in companies under coverage Company Event Implication / Remark Aban Offshore Listing of Singapore subsidiary Funds Raised will be used to repay debt Impact on Earnings Low Probability of Event Medium Garware Offshore Non-fund based revenues from Ship Designs, Ship Broking, KPO & Maintenance Increase in PAT & Return ratios Low High Great Offshore Acquisition of rig(s) from Sea Dragon Increase in leverage & a big jump in earnings Very High Medium SEAMEC New Vessel Acquisition, De-listing of Scrip Jump in Profits, Rerating of the stock High Low Relative Valuation We observe that the market is using a choice/mix of P/E & DCF based valuation at its convenience. We have given a comparative using P/E, P/BV & EV/EBITDA. However, we prefer a cash flow based valuation over relative valuation for these companies because : (1) earnings are erratic & not reflective of a normalized year; & (2) the high visibility on account of the long term contract rates merit the use of DCF over other options. Earnings for a given year could be erratic on account of addition/change in rate of any vessel during the year and on account of presence/absence of dry docking expenditure. Even incase of a steady state scenario, the earnings would normally depreciate on account of the increasing opex. However, using the DCF based valuation, one can capture the erratic impact of dry docking over a longer duration, plus factors like increase in opex & cost-of-replacement of vessels can be effectively factored in. Companies DCF Valuation P/E (x) P/BV (x) EV/EBITDA (x) WACC Calculated Discounting Rate (Rs.) FY09E FY10E FY09E FY10E FY09E FY10E Aban Offshore 4, % 13.0% Garware Offshore % 13.0% Great Offshore % 13.4% SEAMEC * N.A % 14.6% * SEAMEC follows Calender Year. Loss for CY08E, hence no PE 6

7 Indian Offshore Sector Discounted Cash Flow Based Valuation A DCF exercise is as effective as its assumptions. We have tried to ensure some consistency in our assumptions for each of the companies covered in this report. We highlight the same hereunder : 1 stage DCF Model with interim cash flows till FY14E (6 years) and terminal value thereafter. Replacement Capex assumed over & above maintenance capex. Else, there is a limited life for an offshore asset and having a terminal value is impossible. FY14E the 'terminal year' is a normalized year. The revenues have a slightly moderated with a 5% trim in the day rates across the board for all vessels & for all companies. We have a 13% threshold for ourselves. We have used the calculated WACC or our threshold 13%, whichever is higher, as the discounting rate. So, we end up discounting Aban & Garware at 13% each higher than their respective WACC rates (10.1% & 11.2%). Great Offshore & Seamec are discounted at their respective WACC rates of 13.4% & 14.6%. We have done this because we believe that the free cash flows should not only recover the cost of capital but also deliver a reasonable annuity going ahead. The 13% is for this reasonable annuity that we would expect from a prospective investment. We have assumed the free cash flow to 3% to reflect the long term inflationary effect. Overall Check On quality & strength of the call. We see that Aban emerges as a clear winner in the lot, on almost all parameters. Aban Offshore is a meaningfully larger player than its competition. It is one of the top 10 drilling asset owners in the world. The positioning is the best with the entire business focused on the rig segment. The financial superiority of this model is reflected from the Asset Payback Calculations (See Page 4). 5). In terms of relative valuations also, Aban is better than many on various aspects. While this is comforting, we do not merit the use of relative technique to derive the target price for any company in this segment. Based on our DCF calculations, Aban should fetch the highest upside of an attractive 47% from the current levels. Most importantly over here, we see that as much as 47% of the overall valuation of Aban is coming from the interim cash flows over FY09-FY14E. Cash Flows CMP (Rs.) DCF Value 6 years Interim Cash Flows Terminal Value Aban Offshore Ltd. 3, , % 53% Garware Offshore Services Ltd % 76% Great Offshore Ltd % 50% SEAMEC Ltd % 52% 7

8 Sector Overview Offshore Sector Overview Constantly rising crude oil prices In June 2008, crude oil prices have touched record levels of US$ 140 per barrel, breaching all its historical highs. Past two years have seen the steepest rise in crude oil prices, since that seen in the 1980's. 160 Global Oil Price Trend US$/Barrel End End End End End End March June Source: IEA, Industry, PPFAS Research The biggest catalyst for oil's seemingly steep rise has been the simplest economic driver : the balance between demand and supply. The International Energy Agency (IEA) expects oil prices to remain firm for the foreseeable future, due to rapid increase in demand from the huge developing economies of China & India. IEA expects the world's primary energy needs to grow by 55% between 2005 & 2030, at an average annual rate of 1.8% per year. It sees the world's two emerging giants China & India to account for 45% of the increase in global primary energy demand, with both countries energy use set to more than double between 2005 & China & India have now catapulted into the second & fourth largest energy consumers, after the US & Japan, respectively. Fossil fuels worldwide are the major suppliers of energy, with oil being the dominant source given its importance in the transportation & industrial end-use. IEA expects global oil demand to reach 99 million barrels per day (MBD) in 2015 & 116 MBD in 2030, up from 84 MBD in Global Oil Demand Supply (Mn Barrels per day) Years Demand Supply Non-OPEC OPEC E E E E E Source : IEA, BP Statistical Review of World Energy, PPFAS Research 8

9 Offshore Sector Overview On the supply side, world oil output is expected to become more concentrated in a few Middle Eastern countries. Although production capacity at new fields are expected to increase over the next five years, it is very uncertain whether it will be sufficient to compensate for the decline in output at existing fields & meet the projected increase in demand. A supplyside crunch in the period to 2015, involving an abrupt escalation in oil prices, cannot be ruled out. Sustained growth in global oil consumption with no major oil finds have resulted in a steady depletion in spare oil production capacity, reaching a three decade low of approximately 2 Mn. Barrels per day in Global Spare Production Capacity Mn b / day Source: Bloomberg Financial, BP Statistical Review; IEA, PPFAS Research Accelerating Global Demand Spare Production Capacity & Oil Price Dynamics Low Non-OPEC Supply Growth OPEC Spare Capacity reduced Bottlenecks in Downstream Global Oil Markets ability to respond to shocks - Weakened Accelerated rise in Oil Prices Volatility in Oil Prices History of Low Investments Impact of shocks magnified in absence of spare capacity Geopolitical/Weather Shocks Refinery fires Speculators 9

10 Offshore Sector Overview Increased E&P spending Offshore drilling & support - the key beneficiary Deep is where oil lies With oil and gas demand growing at a strong pace to support global economic development, global oil & gas companies are forced to drill deeper than before, thereby leading to an increase in worldwide offshore exploration & production (E&P) spending. With tighter, demand-driven markets & high oil prices has come an intensified push for exploration & production of the world's deep-water hydrocarbon resources. With 1) Global oil reserves at all time low, 2) Constantly rising demand for oil & gas & 3) Consequential all time high oil prices are forcing global upstream oil & gas companies to increase E&P spends to secure new oil finds. Besides with crude oil prices staying way above the Hurdle Rate (rate which global oil & gas companies use to justify their project investments), it makes more business sense for these companies to increase their annual spend going forward Hurdle Rate Oil Prices? Source : BP Statistical Review of World Energy, PPFAS Research Historically, global E&P capex has increased at ~11.8% CAGR over period. This when compared to the E&P capex growth at just 2.3% CAGR over the previous decade of , shows a significant jump. 350 Global E&P Spend (LHS) Oil Price (RHS) Historical Global E&P Capex US$ Bn US$/Barrel Source : IEA, PPFAS Research 10

11 Offshore Sector Overview According to the latest Lehman Brothers Original E&P Spending Survey, worldwide E&P spending is expected to grow by over 11% in 2008, to an estimated US$ 369 billion, up from US$ 332 billion spent in 2007, marking the sixth consecutive year of double-digit growth % E Source : Lehman Brothers Original E&P Spending Survey, PPFAS Research More & more E&P spending by the worldwide oil & gas companies spurred by strong demand & higher prices has supported the push to deep & ultradeep water areas, where greater potential for major discoveries exists. Global energy experts believe that the world's shallow-water oil reserves have already matured & will eventually start to decline. They believe that deep water & ultra-deep water are the areas where good prospects of major oil finds still remain. The fact that Arctic areas including Norway, Barents Sea, Russia, Canada, Alaska has 75 billion barrels of oil equivalent, which is approximately 25% of the world's undiscovered reserves, proves the true untapped potential of deep water areas % 33.6% Offshore 2% 66.0% Offshore 60.0% Onshore Deepwater Shallow Water 37.5% % 12.5% 50.0% Source : Douglas Westwood, The World Offshore Oil & Gas Forecasts , PPFAS Research 11

12 Offshore Sector Overview Douglas Westwood Ltd., an international energy analysts firm, in their report 'World Offshore Drilling Spend Forecast ' estimates that drilling attracts nearly 45% of the total offshore capex & that, by 2011, the offshore drilling market will be worth about US$ 62 billion, having grown from US$ 58 billion in The report further estimates that in 2006, US$ 46 billion were spent on shallow water drilling, representing nearly 80% of all drilling expenditures, with approximately US$ 12.5 billion being spent on deep water drilling. By 2011, it is forecast that deep water drilling expenditure will have increased to over US$ 18 billion, whilst shallow water drilling spends will have declined slightly Shallow Water Spend Deepwater Spend Shallow vs Deep water spend Well Spend (US$ Mn) E 2009E 2010E 2011E Source : Douglas Westwood, The World Offshore Oil & Gas Forecasts , PPFAS Research Others - 1% Western Europe - 3% North America - 24% Projected Deep water Spending (By Region E) Africa - 40% Latin America - 20% Asia - 10% Australasia - 2% Source : Douglas Westwood Ltd., PPFAS Research 12

13 Global Rig Economics Offshore Sector Overview With oil prices achieving record highs & global oil & gas companies increasing their E&P activities, demand for offshore drilling rigs continues to expand. In the last 12 months, the worldwide rig fleet has enjoyed more than 90% utilization rate, with average day rates hovering around the US$ 200,000 mark. Type In Service Building Total Drill ships Worldwide Offshore Drilling Rigs (25 Jan.2008) Semi-Submersibles Jack ups Submersibles Drilling Barges Totals Source : Colton Company, PPFAS Research With such market strength, drilling contractors have added 17 new rigs to the supply chain in the past 12 months, accounting to more than 50% of the new rigs to join the global fleet in the last three years. High Utilization & Lengthening Contracts Due to the tightness in worldwide rig availability, the past three years have seen effective utilization rates for Floaters & Jack up rigs at all depth ratings at almost 95% (effective utilization refers to rigs working or being marketed, as opposed to total rigs which includes those in shipyards or cold stacked), compared to about 80% in mid-2004, when crude oil prices began to escalate sharply from the US$ 20 to US$ 30 per barrel levels that prevailed for several years. Global Rig Demand - Supply Scenario E 2009E 2010E Supply Jack ups Demand Utilization 91% 92% 92% 90% 91% 94% Semi-Submersibles Supply Demand Utilization 90% 96% 97% 98% 95% 95% Supply Drill-Ships Demand Utilization 83% 98% 95% 96% 94% 94% Supply Total Demand Utilization 91% 94% 94% 92% 93% 94% Source : Rigzone, PPFAS Research 13

14 Offshore Sector Overview Recently, the US Gulf of Mexico rig market has experienced a downward trend in its fleet size as slack demand is driving rigs from the area. But other parts of the world are not only compensating with strong rig demand, but also benefiting from the US GoM market troubles. This decline in jack-up demand in the US GoM has largely been due to the operator's preference steering towards the region's deep waters. Dec Jan Apache 8 5 Chevron 6 5 Energy XXI 4 0 Newfield Exploration 4 0 Rig status in the Gulf of Mexico Bois D'Arc Resources 3 3 Pemex 3 0 Nexen 3 0 Remaining operators - 1 rig each Remaining operators - 2 rig each Hall-Houston 0 3 Anglo-Suisse 0 3 Total Source : Hercules Drilling, ODS Petrodata, PPFAS Research The year 2008 will also see the most significant number of new additions to the rig fleet in a long time, with 53 new drill-ships, semis & jack ups arriving. Jack ups Semis Ships Others Total E Newbuild by Delivery dates 2009E E Undetermined Total % Uncontracted 75.0% 20.9% 50.0% 33.3% 54.7% Source : ODS Petrodata, Data as of Sept. 2007, PPFAS Research The concern among investors is on the supply side & the fear that an influx of new capacity over next 3 years & beyond will dampen day rates. But it appears at this time that there is sufficient demand to absorb new construction without pushing day rates lower. This is also true to the fact that majority of these additions would be utilized to replace the aging existing fleet. An age analysis of the current active rig fleet shows that about 70% is above 20 years & another 16% is above the age of 30 years Age Analysis of Rigs Source : Jindal Drilling, PPFAS Research 1960's 1970's 1980's 1990's

15 Offshore Sector Overview Major chunk of the current fleet was built during the period , which will be replaced in the next couple of years, as the working life of a drilling rig is estimated at years. In the current tight availability scenario, global oil & gas exploration companies are entering into longer 3-5 year contracts to fulfill their drilling requirements. Drilling contractors on the other hand, are placing orders with shipyards for new-builds, for delivery beyond 2011, without a contract in hand, giving a clear indication of the market tightness. In addition, tight shipyard & vendor capacity is resulting in rig delivery delays, as witnessed in Noble Corporation's recent announcement that two of its jack-ups under construction will go on contracts five months later than expected. A contractor like Noble, who enjoys high reputation for delivering rigs on time & within budgets, experiencing delays in rig delivery gives a clear indication of the state of tight schedules at the global shipyards. Effective High Day Rates Strong demand & ever-tightening rig supply has kept an upward pressure on day rates. For example, 2nd & 3rd generation semi-submersibles that were cold stacked in 2004, were committed at day rates of US$ 175,000 by mid 2005 & are now contracted for day rates in the US$ 300,000s. 4th generation rigs earning US$ 70,000 per day in 2004, were up to US$ 240,000 by mid 2005 & are topping US$ 400,000 currently. This steep rise in day rates can be gauged looking at the ODS-Petrodata Rig Day Rate Index. Day Rate Index Fleet Utilisation (%) % % Worldwide Floating Rig Day Rate Index (1994 = 100 June 2008 = 876) Day Rate Index % 40% Fleet Utilisation % Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Source : ODS Petrodata, PPFAS Research 15

16 Offshore Support Vessels Offshore Sector Overview Offshore Support Vessels (OSVs) are vessels that undertake production & diving support, supply of personnel & equipments, anchor handling & towing, rig moving, emergency response/rescue & fire-fighting operations. These services form an integral part of the overall services provided by the offshore operators. Generally, an oil & gas production & exploration platform requires on an average 4-5 support vessels, which vary depending on the tonnage capacity of the support vessel. Despite more volatility in day rates & a great deal of speculation concerning impending oversupply, the activity in the Offshore Support Vessel (OSV) market remained high for 2007 & has continued as such in Day Rates in the North Sea (the best barometer of the supply vessel market) have remained firm as in the year On the back of high day rates, offshore vessel owners have continued to procure offshore support tonnage at about the same rates as in 2006, in order to meet an expected increase in demand as well as to meet a general need for fleet renewal. Worldwide Estimated OSV Count AHTSV ` PSV E 2020 E E 2020 E Source : OSC OSV Global Prospects to 2020, PPFAS Research With the steep increase in demand for drilling rigs & production platforms, there has been a consequential increase in demand for support vessels. The entire OSV fleet has witnessed an increase in day rates by two to three times, due to high utilization of these vessels across the industry, driven by higher spending by the E&P companies. AHTSV PSV Worldwide OSV Day Rates ` ` Source : OSC OSV Global Prospects to 2020, PPFAS Research With such high demand, low supply due to long gestation periods, high capital expenditure involved & 100% capacity utilizations at the global shipbuilding yards, charter rates are expected to remain firm, both for rigs & support vessels. 16

17 Indian Offshore Market Offshore Sector Overview The oil & gas industry has been instrumental in fueling the rapid growth of the Indian economy. It contributes about 45% of the total energy consumption of the country, which is currently the fourth largest energy consumer in the world. India still depends on imports of more than 70% for its oil requirements. According to a report prepared by KPMG, India's oil demand is expected to grow at an annual average of 3.6% from 119 million metric tonne (MMT) in 2004 to 196 MMT in & 250 MMT by Domestic production of crude oil has grown by 5.6% in to MMT from MMT in The production during April-November 2007 has been at MMT Consumption Production India's Consumption & Production of Crude oil E E E India has 26 sedimentary basins with an area of 3.14 million square km & prognosticated reserves of 28 billion tonne of oil equivalent of gas. The country is relatively unexplored with only 18% of area extensively explored & only 25% of the prognosticated reserves have been established till date % % 20% 49% 17% 44% 18% 21% Moderate Well Explored Exploration Initiated Poorly Explored Unexplored Source : DGH, PPFAS Research The Government plans to expand the exploration licensing area further from 44% of the Indian sedimentary basin in 2007 to 80% by & to 100% by

18 Offshore Sector Overview Domestic E&P spend on the rise The development of E&P sector has been significantly boosted through New Exploration & Licensing Policy (NELP) of the Government of India, which brought major liberalization in the sector and opened it up to for private and foreign investment, where 100% Foreign Direct Investment (FDI) is allowed. Since the implementation of NELP, India's domestic E&P spend has been on the rise. With on-land & shallow water basins being relatively better explored, offshore, especially deep water, is an emerging frontier in India which has attracted huge interest & investments over the past few years. Blocks awarded under NELP NELP Blocks Onshore Offshore Deep Water Shallow Water NELP I NELP II NELP III NELP IV NELP V NELP VI NELP VII Source : DGH, NELP, PPFAS Research After six rounds of NELP, the area under implementation has increased four times from 11% to 44% of the Indian sedimentary basin. Hydrocarbon reserves accretion has already been more than 600 million metric tonnes of oil equivalent (MMTOE). Under NELP, 49 oil & gas discoveries have already been made by private/joint venture companies in 15 exploration blocks, with an expected investment to the order of US$ 8 billion. Indian & foreign oil & gas exploration companies have constantly been increasing their E&P activities & correspondingly their E&P budget allocations. This can be seen from E&P spend forecast for ONGC, India's largest oil & gas company. 25, % 20,000 15,000 ONGC E&P Outlay 10,000 5,000 0 FY07A FY08E FY09E Source : ONGC Press Release 30 Oct. 2007, PPFAS Research As per our understanding, out of all the NELP rounds undertaken so far, work has recently started on NELP IV blocks. Each NELP takes an approximate nine years for completion. Taking into consideration that work on NELP IV has just begun, there appears to be strong & long E&P schedule within the country, with blocks under NELP V & NELP VI already announced & NELP VII to be announced later this year. This is expected to further stimulate the demand for offshore drilling units & support vessels within India, for many more years to come. 18

19 Offshore Sector Overview Rig & Support Vessel Economics in India The tightness in the global offshore drilling rig market has impacted India's exploration activities as well. India is helping explorers tackle rig shortage by extending drilling deadlines in license agreements. The offer for oil & gas fields under NELP VII has been delayed until August 2008 from March 2008 due to shortage of rigs. The shortage has delayed drilling in existing fields as well and slowed the country's quest to cut its dependence on imports. The government has also asked operators to share drilling rigs & other seismic equipments & had hired Rig Management Norway AS, to carry out a study on sharing exploration services. Total rigs deployed in India Transocean ONGC Aban Noble Drilling Premium Drilling Great Offshore ENSCO Nabors Offshore Hercules Offshore Pride International Jagson Drilling Atwood Oceanics Saipem Precision ESSAR Neptune Marine Source : Great Offshore, PPFAS Research Total Support Vessels deployed in India Source : Great Offshore, PPFAS Research Spot Market AHTSV AHT PSV Tugs Supply Vessels MSV Time Charter Utility Survey Vessels Vessels FFSV SSV Subsea Vessels 19

20 Aban Offshore Limited CMP Rs. 3,006.0 Target Rs. 4, th June, 2008 Initiating Coverage BUY Stock Data Bloomberg : ABAN.IN Reuters : ABAN.BO BSE Code : NSE Code : ABAN BSE Group : A Stock Codes Benchmark : OILGAS Index 52 W High/Low : / Mkt Cap : Rs. 116,509 Mn Free Float : Mn Shares Face Value : Rs. 2.0 Shareholding Pattern (as on March 08) Promoters 21.0% Institutions 60.9% Indian Public 13.0% Others 5.1% Stock Returns Best placed to reap the benefits of the industry upcycle Surging E&P activities across the globe are expected to keep the dayrates for rigs at substantially higher levels in the coming times. Being India's largest private sector offshore drilling rig company with a pool of 21 assets within its fleet, Aban is well placed to reap the benefits & garner from the robust offshore industry fundamentals. Inorganic Expansion at the right time Aban opted for the inorganic route of expansion with the takeover of the Norwegian offshore drilling company Sinvest ASA. With this acquisition, Aban directly got hold of 9 premium drilling rigs & 1 drillship owned & operated by Sinvest. In the current buoyant industry scenario, getting direct access to such a large number of premium drilling assets puts Aban in the league of top 10 players in the world. Further additions to rig fleet to boost top-line Aban Offshore has 3 premium drilling rigs coming into its fleet in this financial year & during the first quarter of the next financial year(of the total of 21). These assets, we believe would fetch similar or higher day rates as compared to its current assets, which would substantially boost its top-line. Revenues growing at 36% CAGR After the company takes delivery of all its new assets, we estimate Aban's revenues to grow at 36% CAGR during FY08-FY11E period. This would be on the back of the new rigs getting operational & re-pricing for its existing assets during this period. We estimate the company's EBITDA to grow at a slightly higher rate of 39% CAGR over the same period. ABAN BSEOIL 1 Mth 3 Mths 6 Mths Singapore listing to act as a trigger Aban plans to list its Singapore subsidiary - Aban Singapore Pte. Ltd. on the Singapore Stock Exchange, thereby unlocking value for its shareholders. This would definitely act as a trigger for the scrip. Price Comparison Aban BSEOIL Jun-07 Oct-07 Feb-08 Jun-08 Analyst Hiren Samani : Jigar Valia - hiren@ppfas.com jigar@ppfas.com Jigar Valia - jigar@ppfas.com ppfas@bloomberg.net Particulars (Rs Mn) FY06 FY07 FY08E FY09E FY10E FY11E FY12E Total Revenues 4, , , , , , ,898.1 PAT (140.0) 2, , , , ,245.0 EPS (Rs.) 22.3 (3.8) P/E (x) (791.9) P/BV (x) EV/EBITDA (x) ROCE (%) 12.6% 2.9% 8.7% 22.8% 25.9% 25.7% 25.5% RONW (%) 19.1% -2.6% 25.6% 69.4% 51.1% 36.9% 29.5% Note: FY08E is first consolidated year with Sinvest. 20

21 Aban Offshore Limited Company Profile Formerly known as Aban Loyd Chiles Offshore Ltd. - an Indo-US venture started in 1986, Aban Offshore Ltd. (AOL), today is India's largest offshore drilling entity in the private sector. AOL provides world class drilling & other oil-field services for offshore exploration & production (E&P) of hydrocarbons to the oil industry in India & abroad. The Company has two business segments - Offshore Oil Drilling and Production services & Wind Power generation. During 2007, AOL, through its Singapore subsidiary acquired Sinvest ASA, a drilling company that was listed on the OSLO stock exchange, Norway; (delisted after acquisition by AOL). With this acquisition, Aban currently holds 20 offshore drilling assets & 1 Floating Production & Storage Unit (FPSU), placing it among the top ten offshore drilling asset owners in the world. An ISO 9001:2000 certified company, AOL's list of customers include global giants in the Oil & Natural Gas Industry like ONGC, Hardy Exploration & Production (India) Inc. (HEPI), Oriental Oil Co., Dubai, Cairn Energy, Petronas Carigali among others. AOL also ventures into Wind Power generation through its subsidiary Aban Energies Ltd., which operates 230 wind energy generators at Nagercoil, Tamil Nadu. ABAN OFFSHORE LIMITED (INDIA) Offshore Drilling 100% Aban Holdings Pte Ltd. (Singapore) 89.33% Aban Singapore Pte Ltd. (ASPL) Business Segments Wind Energy 100% Aban Energies Ltd. (India) 40% 100% 100% 100% 100% 100% Sinvest ASA (Norway) 60% Aban International Norway AS Aban Abraham Pte Ltd. Aban Pearl Pte Ltd. Aban 7 Pte Ltd. Aban 8 Pte Ltd 100% 100% 50% 18% DDI Holdings AS Beta Drilling ASA Venture Drilling ASA Petrojack ASA (Norway) Deep Drilling Invest Pte Ltd. (Singapore) 100% 50% Premium Drilling Murmanskaya Deep Venture 100% 100% 100% 100% 100% 100% 100% 100% Deep Drilling 1 Pte Ltd. Deep Drilling 2 Pte Ltd. Deep Drilling 3 Pte Ltd. Deep Drilling 4 Pte Ltd. Deep Drilling 5 Pte Ltd. Deep Drilling 6 Pte Ltd. Deep Drilling 7 Pte Ltd. Deep Drilling 8 Pte Ltd. Source : Company, PPFAS Research 21

22 Aban Offshore Limited Inorganic Expansion at the right time Over the last two to three years, Aban has strengthened its industry presence from two jack-up rigs to seven (Aban VII and Aban VIII being the latest additions), two drill-ships (Frontier Ice and Aban Abraham) and an FPSU (Tahara). This growth chart is a result of organic and inorganic initiatives. Vessel Name Vessel Type Year of Built Refurbishment Water Depth (Feet) Drilling Depth Feet) Aban II Jack up Rig / ,000 Aban III Jack up Rig / ,000 Aban IV Jack up Rig ,000 Aban V Jack up Rig ,000 Aban s Fleet Details Aban VI Jack up Rig / ,000 Frontier Ice Drill-ship ,000 20,000 Tahara FPSU Aban Singapore Aban VII Jack up Rig ,000 Aban VIII Jack up Rig Q2 CY ,000 Aban Abraham Drill-ship ,600 25,000 Aban Pearl Semi-SubmersibleQ4 CY2007 1,250 25,000 Source : Company, PPFAS Research Following the international rig industry practice, Aban Singapore Pte. Ltd. (ASPL), a 100% subsidiary of AOL, housed the new drilling units under single rig owning Special Purpose Vehicles (SPVs). During the year , AOL successfully took over Sinvest ASA (Sinvest), a Company incorporated in Norway and listed with Oslo Stock Exchange in two stages. Initially Aban Singapore Pte Ltd (ASPL) acquired a 40 % stake in Sinvest from its erstwhile sponsor and through the open market. Later, Aban International Norway AS (AIN), a wholly owned subsidiary of ASPL, acquired the remaining 60 % stake through a mandatory offer to all shareholders. With this acquisition, AOL got access to all the drilling assets owned by Sinvest. Vessel Name Vessel Type Year of Built Water Depth Drilling Depth (Feet) Feet) Deep Driller 1 BMC Pacific 375 Class Jack up Rig ,000 Deep Driller 2 KFELS Super B Class Jack up Rig ,000 Deep Driller 3 KFELS Super B Class Jack up Rig ,000 Deep Driller 4 BMC Pacific 375 Class Jack up Rig ,000 Sinvest's Fleet Details Deep Driller 5 KFELS Super B Class Jack up Rig ,000 Deep Driller 6 KFELS Super B Class Jack up Rig Q3 2008E ,000 Deep Driller 7 BMC Pacific 375 Class Jack up Rig Q3 2008E ,000 Deep Driller 8 KFELS Super B Class Jack up Rig Q1 2009E Deep Venture* Drill-ship 1981 / ,200 20,000 Murmanskya Jack up Rig 1981 / ,000 * Sinvest ASA has only 50% ownership for Deep Venture. Source : Company, PPFAS Research 22

23 Aban Offshore Limited The acquisition of Sinvest got Aban in the league of 10 largest offshore drilling service providers in the world. This acquisition strengthened the company's portfolio of ultra-premium new-built jack-up rigs, reducing the average age of its asset portfolio from 30 to 10 years & also deepened the company's drilling capability from 20,000 feet earlier to 30,000 feet now. It has also transformed Aban from an India-centric presence to an entity of global reckoning with a wider clientele. Construction of a new rig usually takes 3-4 years. In the current scenario of increased demand for offshore drilling rigs & with global shipyards incapable of matching demand, Aban's inorganic growth seems to have come at the right time where the upstream industry is facing a severe rig shortage. This timely capacity addition will give Aban a high leverage to the enhanced industry economics. Higher Gearing ASPL paid approx. US$ 1.32 billion to acquire the entire equity of Sinvest ASA during June 2006 to March Period Equity Stake Cost (US$ Mn) Comments Jun-06 34% 445 Acquisition by ASPL from promoters June Sept. 06 6% 82 Open Market Purchase Jan-07 10% 134 Open Market Purchase Feb-07 47% 635 Mandatory offer to shareholders Mar-07 3% 26 Compulsory Acquisition of balance shares Total 100% 1,322 Source : Company, News Reports, PPFAS Research Besides, at the time of acquisition, Sinvest had placed orders for eight premium jack up rigs at a total cost of US$ 1,041 Mn. & was still liable to pay an estimated amount of US$ 514 Mn. It also had a debt of about US$ 350 Mn. on its books as of Q All things taken together, the total estimated cost to ASPL would be around US$ 2.2 billion. US$ Million Cost of buying Sinvest's equity 1322 Cost of Rigs payable (estimate) 514 Net debt of Sinvest 350 Total cost of acquisition 2186 Source : Sinvest, Company, PPFAS Research ASPL had to borrow heavily to fund this cost of US$ 2.2 billion, which has stretched Aban's consolidated balance sheet. We estimate Aban's net debt to be Rs. 121,576 Mn. in FY08E, which we expect to come down drastically by FY11E with the help of the huge cash flows that it would generate over this period. 23

24 Aban Offshore Limited Asset Acquisition Continuing its inorganic growth initiative and its intent to increase its deepwater drilling capability, AOL acquired semi submersible rig Bulford Dolphin during third quarter FY08, at a consideration of US$ 211 Mn. Bulford Dolphin is a 2nd generation Semi-submersible with rated water depth of 1,250 feet and drilling depth of 25,000 feet. The rig has been renamed to 'Aban Pearl' & will be owned by Aban Pearl Pte. Ltd. (APPL), a wholly owned subsidiary of Aban Singapore Pte. Ltd. (ASPL). Bulford is likely to get a day rate of US$ 250,000 and an opex of US$ 80,000 per day. 25 Jack up Drill ship FPSU FY2006 FY2007 FY2008E FY2009E Source : Company, PPFAS Research Pricing at higher day rates For all contracts entered during the year , Aban has been able to deploy its assets at much higher day rates compared to the previous contracts that these assets were contracted at. Vessel Name Old Contract New Contract Client Day Rate (US$) Client Day Rate (US$) Aban III ONGC 57,500 ONGC 156,600 New Contracts entered at higher day rates Aban IV ONGC 57,500 ONGC 156,600 Aban V ONGC 57,500 ONGC 156,600 Aban VI Oriental Oil 40,000 Oriental Oil 88,500 Frontier Ice 42, ,000 Tahara HEPI 26,000 HEPI 88,500 Deep Driller 1 HEPI 185,000 GSPC 197,000 Murmanskya ROC Oil 195,000 Husky Oil 210,600 Source : Company, BSE, PPFAS Research Looking at this performance & the overall rig market dynamics, we expect that all the vessel additions to Aban's fleet will fetch attractive & healthy day rates going forward. New Vessels expected to fetch high day rates Vessel Name Aban VIII Aban Abraham Aban Pearl (Bulford Dolphin) Deep Driller 6 Deep Driller 7 Deep Driller 8 Source : PPFAS Research Expected Day Rates (US$) 208, , , , , ,000 With AOL entering into contracts at such higher day rates & for periods of 3-6 years, there is a clear revenue earning visibility for the company. 24

25 Aban Offshore Limited Aban Singapore listing to add trigger AOL raised US$ 150 million by issuance of Convertible Notes in its Singapore subsidiary Aban Singapore Pte. Ltd. (ASPL). With this, Aban will be diluting 10.67% in ASPL on conversion of these notes. This sets the equity value of ASPL at about US$ 1.45 billion, which is much ahead of market expectations. Consequently, the implied value of Aban's stake (89.33%) of the diluted equity in ASPL works out to be US$ 1.3 billion. AOL plans to list its subsidiary - ASPL on the Singapore Stock Exchange which when done, would be India's largest IPO abroad for a subsidiary. It is expected to dilute a total of 20% in ASPL, inclusive of the 10.67% dilution through convertible notes. The company has appointed UBS & Merrill Lynch as lead managers to the issue. This fund raising was primarily aimed at refinancing its existing debt structure, that it took on the balance sheet for Sinvest acquisition. AOL has delayed the plans of listing ASPL in view of the current market conditions, which has had a dampening impact on the stock. However, we believe that the listing, whenever it happens, would act as a trigger to improve the overall valuations of the company. Valuation & Recommendation Aban Offshore is our top pick with a 47% upside. It's WACC is much lower at 10.1% as compared to our desired discounting rate of 13%. Apart from this, there is ~47% of our DCF value comes from the explicit period of FY09E-13E. Importantly, Aban is also better on other parameters like P/E (5.4x FY10) & EV/EBITDA (5.3x FY10). Aban neither has any ensuing capex to constrain the DCF valuation, nor is dependent on any event. It is a meaningfully larger player than its competition, being one of the top 10 drilling asset owners in the world. We initiate a BUY with a price target of Rs DCF Valuation Particulars FY09E FY10E FY11E FY12E FY13E FY14E Free Cash Flow 22, , , , , ,655.8 Free Cash Flow Discounted 22, , , , , ,467.7 Cost of Debt 7.5% % OF Enterprise Value Tax Rate 16.3% PV of Terminal Value 53.1% Net Cost of Debt 6.3% PV of Interim Cash Flows 46.9% Cost of Equity 15.0% Total 100.0% Weight of Debt 56.5% Weight of Equity 43.5% Enterprise Value 272,326.9 WACC Rate 10.1% Less : Debt (108,240.4) Discounting Rate 13.0% Add : Cash & Investments 3,160.6 Terminal Growth Rate 3.0% Shareholder's Value 167,247.1 Terminal Value 266,557.8 No. of Equity Shares 37.8 PV of Terminal Value 144,676.9 Fair Value (Rs.) 4,426.3 PV of Interim Cash Flows 127,650.0 CMP (Rs.) 3,006.0 Enterprise Value 272,326.9 Upside 47.2% 25