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

| About: Rowan Companies (RDC)

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
1 Rowan Renaissance 2014

10/12

(Drilling 40k)

4/17 625 West Africa
2 Rowan Resolute 2014

10/12

(Drilling 40k)

En-route 10/14

9/17

608

Gulf of Mexico
3 Rowan Reliance Q4 2014

10/12

(Drilling 40k)

1/18 602 Gulf of Mexico
4 Rowan Relentless Q2 2015

10/12

(Drilling 40k)

7/2017 (1) 582 Gulf of Mexico
Click to enlarge

(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
1 Rowan EXL III 2011 3 12/14 180 Gulf of Mexico
2 Cecil Provine 1982 2 8/14 125 Gulf of Mexico
3 Rowan Juneau 1977 1 Available - Gulf of Mexico
4 Rowan Alaska 1975 1 Available - Gulf of Mexico
5 Rowan Louisiana 1975 1 9/14 108 Gulf of Mexico
6 Rowan Gorilla IV 1986 3

8/14

125

Gulf of Mexico
7 Joe Douglas 2012 3 8/14 165 Gulf of Mexico
8 Ralf Coffman 2009 3 9/14 243 Mediterranean
9 Bob Keller 2005 3

5/24

178

Middle East
10 Hank Boswell 2006 3

8/15

180

Middle East
11 Scooter Yeargain 2004 3

11/14

11/15

128

180

Middle East
12 Bob Palmer (3) 2003 3 8/14 273 Middle East
13 Arch Rowan (3) 1981 2 11/14 81 Middle East
14 Charles Rowan (3) 1981 2 11/14 81 Middle East
15 Gilbert Rowe 1981 2 12/15 122 Middle East
16 Rowan Mississippi 2008 3

12/14

12/15

188

195

Middle East
17 Rowan California 1983 2 9/16 144 Middle East
18 Rowan Middletown (3) 1980 2 11/14 80 Middle East
19 Rowan Norway (2) 2011 3 7/16 361 North Sea
20 Rowan Stavanger 2011 3

9/14

1/15

250

413

North Sea
21 Rowan Viking (2) 2011 3

shipyard 9/14

1/16

3/17

-

345

355
North Sea
22 Rowan Gorilla V 1998 3 6/15 274 North Sea
23 Rowan Gorilla VI (1), (2) 2000 3

8/14 Shipyard

1/18

-

350

North Sea
24 Rowan Gorilla VII 2002 3

11/14

6/15

254

280

North Sea
25 J.P. Bussell 2008 3 9/14 143 South East Asia
26 Rowan EXL I 2010 3 11/14 167 South East Asia
27 Rowan EXL IV 2011 3

12/14

12/15

151

160

South East Asia
28 Rowan Gorilla II 1984 2 11/14 146 South East Asia
29 Rowan EXL II 2011 3 3/17 180 Trinidad
30 Rowan Gorilla III 1984 2

2/15

3/15

160

165

Trinidad
Click to enlarge

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:

  Conventional Premium High-Specification Total
Number of rig 3 8 19 30
Age 39 32 8 X
Click to enlarge

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 2014 Q1 2014
Revenue in $ Million 422.9 377.6
Net Income in $ Million (1) 41.2 34.7
Contract drilling expense in $ million 244.6 220.3
Direct rig-related daily Opex $ K 232.9 211.9
Earnings per share in $ (1) 0.33 0.28
G&A in $ million 29.1 29.9
Interest expense in $ million 27.5 20.7
Shares Outstanding basic in Million 124.9 124.8
Cash and Cash equivalent in $ Million 1,247.0 1,440.4
Long-term Debt $ Billion 2.81 X
Stock price August 11, 2014 in $ 29.72
Enterprise Value $ Billion 5.25
EBITDA $ Million 561.4
EV/EBITDA 9.35
Click to enlarge

(1) Excluding special items.

Average day-rate per the 3 main locations:

  North Sea Middle East GOM
Q2 2014 290.5 141.4 156.9
Q1 2014 273.6 136.0 153.6
Click to enlarge

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.

  Jackups Age Semi-subs Age Drillships Age

EV /

EBITDA

(2)

Backlog

$ Billion

Total Debt

$ Billion

ESV 46 (4 under constr.) 7.5 19 (5 rigs are actually for sale.) 15 10 (3 are under const.) 5 6.74 11.0 4.73
RDC 30 18 (1) 0 - 4 (1 is under const.) 1 9.35 5.1 2.81
Click to enlarge

(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.