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Rowan has an actiivst invovled that could unlock shareholder value.

The activist has had recent success in the offshore drilling space.

Rowan is grossly undervalued compared to its peers and the market.

The offshore drilling industry has been hit fairly hard this year. There's a combination of oversupply and a cutback in spending by major oil companies. However, it remains that exploration companies have flooded the major shale plays. Ultimately, to find new sources of oil and gas, they'll be turning to offshore drilling.

In the meantime, many of the major drilling companies are trading quite cheaply. But the investment case gets even better when you look at the fact that many companies are finding ways to unlock value regardless of the economic backdrop.

Rowan Companies (NYSE:RDC) is one of the more underrated plays in the drilling industry. But it's also one of these "hidden value" stories. Activist firm, Blue Harbour, has a 6.5% stake in the company. This fund isn't known for launching proxy battles or embarking on activist campaigns. But they've been making exceptions in the drilling space.

Blue Harbour was a key player in getting Nabors (NYSE:NBR) Industries to revamp its corporate governance policies. Shares are up 70% year to date thanks to Blue Harbour's help. The rest of the space has been active in unlocking shareholder value as well.

Noble Corp. (NYSE:NE) is set to IPO part of its stand spec fleet. And Transocean (NYSE:RIG) is debuting a master limited partnership (NYSE:MLP) for part of its drillship operation. This'll allow the company to put upwards of $350 million in its coffers.

The MLP route seems like a very viable option for Rowan. Rowan could create an MLP for its drillships to raise capital and then use those funds to build newer drillships and buyback shares of its grossly undervalued stock. And when you dig down, the drilling company is down right cheap.

Trading at just 7.5 times next year's earnings estimates and at 80% of book value, Rowan is one of the cheapest stocks in the industry. And perhaps the entire market. Its P/E to growth (NYSE:PEG) ratio is a mere 0.4. Its historical average P/E ratio is 14 and its P/B is 1.3.

One of the keys for Rowan is that it has strong relationships with top operators. This includes Saudi Aramco, which is the world's largest oil company. The company is looking to boost its production significantly in the interim, which is a big positive for Rowan.

Aramco is expected to extend the agreement for all of its 29 contracted rigs in 2014, eight of which are Rowan's. That means these rigs will fetch higher dayrates. Rowan's Bob Kellers rig just did a 10-year extension with Aramco, which suggests the upcoming contract extensions will also be long-term. Rowan also has a strong utilization rate, with fleet-wide utilization of 80% and an operating utilization of 86%.

Back to Blue Harbour and the likely activist campaign that will be waged at Rowan. It'll be interesting to see what the fund pushes for at Rowan. The company has made management changes recently and gotten rid of non-core assets, so what's left for Blue Harbour to do? As mentioned, the MLP is a possibility, as is a share buyback plan. It already offers a modest 1.2% dividend yield.

Bottom line

Couple its valuation, its net debt to capital ratio of below 20% (one of the lowest in the industry) and that it's becoming more of a balanced shallow and deepwater driller, and Rowan is also a takeover target. It's a multi-year investment, but assuming Blue Harbour gets its way the upside could be to $42. Its last activist stake, in Nabors, made the fund over 75% in just over a year.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within 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.