Rowan Companies: Here's Why I'm Staying Bullish On This Oil & Gas Play

Aug. 8.14 | About: Rowan Companies (RDC)

Summary

RDC recently announced Q2 EPS of $0.33/share which beat Street estimates by $0.11/share, and revenue of $422.9 million beat estimates by a margin of $6.7 million.

Recent trend behavior will improve during the second half of the year especially if RDC can continue to demonstrate strong EPS and revenue growth over the next 6-12 months.

As more and more ultra-deepwater drilling rigs get set for commencement, I strongly believe the company's ultra-deepwater drillship fleet will act as a significant catalyst behind RDC's long-term growth.

On Wednesday, August 6, Rowan Companies plc (NYSE:RDC) reported the results of what I believe to be a very strong second quarter. The company's Q2 EPS of $0.33/share beat Street estimates by $0.11/share, and its revenue of $422.9 million beat Street estimates by an impressive $6.7 million.

In the wake of the company's impressive second quarter, I wanted to examine several reasons behind my decision to consider a long-term position in this oil and gas drilling and exploration play.

Company Overview

Headquartered in Houston, Texas, Rowan Companies is a global provider of offshore contract drilling services, focused on operating safely and efficiently to exceed customer expectations. Rowan is a market leader with one of the youngest fleets in our industry, including four ultra-deepwater drillships, three of which are currently under construction, and 30 jack-up rigs, 19 of which are rated high-specification.

Recent Trend Behavior

On Thursday, shares of RDC, which currently possess a market cap of $3.59 billion, a forward P/E ratio of 6.97, and a dividend yield of 1.39% ($0.40), settled at a price of $28.82/share.

Based on a closing price of $28.82/share, shares of RDC are trading 6.87% below their 20-day simple moving average, 8.37% below their 50-day simple moving average, and 11.78% below their 200-day simple moving average.

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Although these numbers indicate both a short-term and a long-term downtrend for the stock, which would normally translate into a selling mode for both near-term traders and long-term investors, I strongly believe the company's recent earnings performance could be the first step in reversing the company's recent trend behavior.

So what drove results higher during the second quarter? According to Rowan's President and CEO, Tom Burke, "We are pleased that our first ultra-deepwater drillship, the Rowan Renaissance, commenced operations in the second quarter. As our remaining three drillships commence operations over the next twelve months, we look forward to the stability that this earnings growth and associated balancing of our fleet will provide to our shareholders."

It's pretty clear that the company's long-term growth will be heavily dependent on the continued development of its ultra-deepwater fleet which is expected to consist of four ultra-deepwater drillships by March 2015.

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According to the company's most recent investor presentation, the Rowan Renaissance ultra-deepwater drillship commenced its operations on April 22, 2014 and its remaining ultra-deepwater drillships currently under contract (the Resolute and the Reliance) are all expected commence operations by January 2015.

Once all three of these drillships are under contract, I strongly believe the company's long-term revenue could demonstrate significant improvements over the next 6-12 months.

Conclusion

For those of you who may be looking to establish a position in Rowan Companies there are two key things to consider. For starters, shares of Rowan are trading at just over 6.9x forward earnings whereas the shares of both Diamond Offshore (NYSE:DO) (just over 11.3x) and Ocean Rig UDW (NASDAQ:ORIG) (just over 7.9x) were trading at much higher multiples, therefore shares of RDC are comparably much cheaper.

The second of the two things we must consider is the fact that three of the company's four ultra-deepwater drilling rigs are expected to commence operations by January 2015. And once all three of these drillships are operating, I strongly believe the company's long-term revenue could demonstrate significant improvements over the next 6-12 months.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in RDC over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.