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Summary

  • Rowan company Plc., is a strong offshore driller with 30 jackup rigs and 4 UDW new drillship rigs including one to be delivered in 2015.
  • The company released its second-quarter results and it is time to look at the fundamental again, in light of this soft offshore drilling market.
  • The company presents a compelling financial story and should weather any market downturn until 2016. I rate RDC as a speculative buy.

Rowan Company Plc. (NYSE:RDC)

Source: UDW Rowan Renaissance - Rowan website.

The company was founded in 1923 by Charles and Arch Rowan, and provides offshore oil contract drilling services and has expanded worldwide. Rowan Companies Plc. Is based in Houston, Texas.

Rowan has a fleet of 34 offshore drilling rigs, including three drillships under construction. Its fleet consists of four drillships, three of which are under construction, and 30 jackups, 19 of which are rated high-specification. The company has a very strong jackup fleet, and now is trying to enter the market of the ultra-deep drilling sector. The Rowan Renaissance drillship entered the market in April 2014.

Rowan released recently its Q2 2014 results, and I believe it is the right time to look at the company's fundamentals in-depth.

M. Thomas B. Burke is the new CEO, and presented the last conference call on August 6, 2014.

Although it seems like old news now, in the second quarter, we announced a contract with Freeport McMoRan for our fourth drillship, the Rowan Relentless, for 2 years of work in the U.S. Gulf of Mexico. Rowan has worked with Freeport-McMoRan for several years on their Shell ultradeep gas drilling program, and we are thrilled to work for them on their deepwater program. So we are pleased to report that all 4 of our drillships are now contracted into 2017.

2014 is a key year for our company with respect to our Norwegian operations. We acquired Skeie Drilling & Production ASA in 2010 to enable Rowan enter the Norwegian market in a substantial way. And I'm pleased that in the next few weeks, we will have the Rowan Gorilla VI, the Rowan Viking and the Rowan Norway all operating in Norwegian waters, giving Rowan a strong foothold in that market.

Complete fleet analysis as of August 2014.

Monthly fleet status report as of July 18, 2014.

More information has been added after the conference call on August 6, 2014

1 - Ultra-deepwater drillships.

#Name

Year

Built

Specification

K feet

Contract

End

Current

Day rate

K$

Location
1Rowan Renaissance2014

10/12

(Drilling 40k)

4/17625West Africa
2Rowan Resolute2014

10/12

(Drilling 40k)

En-route 10/14

9/17

608

Gulf of Mexico
3Rowan RelianceQ4 2014

10/12

(Drilling 40k)

1/18602Gulf of Mexico
4Rowan RelentlessQ2 2015

10/12

(Drilling 40k)

7/2017 (1)582Gulf of Mexico

(1) , From the last conference call:

we announced a contract with Freeport McMoRan for our fourth drillship, the Rowan Relentless, for 2 years of work in the U.S. Gulf of Mexico.

So we are pleased to report that all 4 of our drillships are now contracted into 2017.

2 - Three categories for the jackups: Conventional (1), Premium (2) and High-Specification (3).

#Name

Year

Built

Specification

(1),(2),(3)

Contract

End

Current

Day rate

K $

Location
1Rowan EXL III2011312/14180Gulf of Mexico
2Cecil Provine198228/14125Gulf of Mexico
3Rowan Juneau19771Available-Gulf of Mexico
4Rowan Alaska19751Available-Gulf of Mexico
5Rowan Louisiana197519/14108Gulf of Mexico
6Rowan Gorilla IV19863

8/14

125

Gulf of Mexico
7Joe Douglas201238/14165Gulf of Mexico
8Ralf Coffman200939/14243Mediterranean
9Bob Keller20053

5/24

178

Middle East
10Hank Boswell20063

8/15

180

Middle East
11Scooter Yeargain20043

11/14

11/15

128

180

Middle East
12Bob Palmer (3)200338/14273Middle East
13Arch Rowan (3)1981211/1481Middle East
14Charles Rowan (3)1981211/1481Middle East
15Gilbert Rowe1981212/15122Middle East
16Rowan Mississippi20083

12/14

12/15

188

195

Middle East
17Rowan California198329/16144Middle East
18Rowan Middletown (3)1980211/1480Middle East
19Rowan Norway (2)201137/16361North Sea
20Rowan Stavanger20113

9/14

1/15

250

413

North Sea
21Rowan Viking (2)20113

shipyard 9/14

1/16

3/17

-

345

355
North Sea
22Rowan Gorilla V199836/15274North Sea
23Rowan Gorilla VI (1), (2)20003

8/14 Shipyard

1/18

-

350

North Sea
24Rowan Gorilla VII20023

11/14

6/15

254

280

North Sea
25J.P. Bussell200839/14143South East Asia
26Rowan EXL I2010311/14167South East Asia
27Rowan EXL IV20113

12/14

12/15

151

160

South East Asia
28Rowan Gorilla II1984211/14146South East Asia
29Rowan EXL II201133/17180Trinidad
30Rowan Gorilla III19842

2/15

3/15

160

165

Trinidad

From the conference call:

(1), Our quarter was negatively impacted by additional shipyard time for the Rowan Gorilla VI as well as off-rate time following the start-up of our first ultra-deepwater drillship, the Rowan Renaissance.

(2), We acquired Skeie Drilling & Production ASA in 2010 to enable Rowan enter the Norwegian market in a substantial way. And I'm pleased that in the next few weeks, we will have the Rowan Gorilla VI, the Rowan Viking and the Rowan Norway all operating in Norwegian waters, giving Rowan a strong foothold in that market.

(3), We're actively working on new contracts extension for those rigs rolling off contract in the second half of 2014, including the 4 rigs working for Saudi Aramco.

Jackups per category and age:

 ConventionalPremiumHigh-SpecificationTotal
Number of rig381930
Age39328X

As we can see, RDC will have problems with its conventional and premium jackups that are nearly obsolete. This represents 11 rigs that will have to be dealt with later, and could be seen as a negative.

Commentary regarding the RDC backlog at the last conference call:

As of the date of our last fleet status on July 18, our backlog of drilling commitments was near an all-time high of approximately $5.1 billion.

Q2 2014 results snapshot.

Link: Conference call on August 6, 2014.

Link: 10Q second-quarter 2014.

 Q2 2014Q1 2014
Revenue in $ Million422.9377.6
Net Income in $ Million (1)41.234.7
Contract drilling expense in $ million244.6220.3
Direct rig-related daily Opex $ K232.9211.9
Earnings per share in $ (1)0.330.28
G&A in $ million29.129.9
Interest expense in $ million27.520.7
Shares Outstanding basic in Million124.9124.8
Cash and Cash equivalent in $ Million1,247.01,440.4
Long-term Debt $ Billion2.81X
Stock price August 11, 2014 in $29.72
Enterprise Value $ Billion5.25
EBITDA $ Million561.4
EV/EBITDA9.35

(1) Excluding special items.

Average day-rate per the 3 main locations:

 North SeaMiddle EastGOM
Q2 2014290.5141.4156.9
Q1 2014273.6136.0153.6

RDC operates also in South-East Asia (About $150k) and Trinidad (About $170k); however, the day-rate were not supplied by the company.

Commentary:

Rowan Company Plc, is a strong offshore drilling company as we can see above. The last second-quarter saw an increase of 12% in revenue from quarter to quarter and despite a definitive slowdown in the jackups market. The stock price has lost about 16% since the beginning of the year.

YTD chart:

RDC Chart

I always try to compare the company I am studying with another similar one, in an attempt to show a detailed comparison that will allow you and me, to gauge better the real strength of the company and its future potential. For Rowan, I believe the company that can be safely compared to, is Ensco Plc. (NYSE:ESV). It is due, mainly, to the strong presence in the jackup rig's market they both have; however, ESV is a bigger company.

Let's look at their mutual rig fleet.

Fleet comparison between RDC and ESV.

 JackupsAgeSemi-subsAgeDrillshipsAge

EV /

EBITDA

(2)

Backlog

$ Billion

Total Debt

$ Billion

ESV46 (4 under constr.)7.519 (5 rigs are actually for sale.)1510 (3 are under const.)56.7411.04.73
RDC3018 (1)0-4 (1 is under const.)19.355.12.81

(1), The conventional and premium jackups are over 30 years old whereas the high-specification jackups are modern and around 8 years old.

(2) the ratio EV/EBITDA is often used to assess the future strength of the company.

YTD Chart comparison:

ESV Chart

ESV data by YCharts

RDC is really shining when compared to a great company like ESV. The ratio EV/EBITDA is a bit high due to, essentially, RDC four modern UDW drillships that have not impacted fully EBITDA yet, and it should be seen more as a sign of strength rather than a sign of weakness, in my opinion.

One clear weakness, is the old age of the conventional and premium jackups which average about 35 years and approximately 11 rigs. Many will have to be cold-stacked or/and sold.

During the last conference call, I was particularly interested about what Mark A. Keller, Vice president of business development, said:

With influx of new supply, we're seeing downward pressure on both day rates and length of term in some operating regions. However, we believe Rowan is well positioned to weather a potential downturn.

Much concern surrounds the number of jack-up newbuilds entering the market. I'd like to take a more detailed look at the makeup of those units. Currently, there are 141 newbuild jack-ups, 18 of which are already committed. That leaves 123 jack-ups that need a contract. We believe approximately 27 of those units are intended for captive markets and will not be competitive with Rowan rigs. Additionally, 73 of the remaining 96 uncontracted newbuilds are what we consider speculative.

Clearly, Rowan will have to be vigilant during this period of oversupply and reduced contract environment. The Jackups working in the Asian market are the most vulnerable; however, RDC has only four rigs actually working there. Furthermore, the new UDW division is now fully contracted until 2017 and will be a significant revenue growth going forward. The company is serving 1.3% in dividend.

I recommend the stock as a BUY.

Disclosure: The author is long ESV. 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.

Source: Rowan Companies: Complete Fleet Analysis As Of August 2014, And Recent Second-Quarter Results