Rowan Companies - What Shareholders Can Reasonably Expect For 2016 And Beyond

| About: Rowan Companies (RDC)

Summary

Rowan Companies, is an offshore driller that I find particularly interesting, because it presents some real strength, but also some obvious weaknesses, that we should not ignore before investing long-term.

RDC will have to renegotiate all its current drilling contracts, especially for the four UDW, at a lower dayrate to secure a bonus extension.

I am sure it will be a time soon, when RDC will be a buying opportunity. But not now, especially before a dividend suspension potential.

Click to enlarge

The drillship Rowan Renaissance.

Rowan Companies (NYSE:RDC) - Most recent fleet status and Q3 2015 results.

December 2015 presentation.

Complete fleet analysis as of October 14, 2015.

Link: Fleet status October 14, 2015.

Ultra-Deepwater Drillships

Name

Contract

End

Current

Day rate

K$

2016

2017

2018 2019 2020

Rowan Renaissance

2014

4/17

620

12

4

0 0 0

Rowan Resolute

2014

10/17

608 12

10

0 0 0

Rowan Reliance

Q4 2014

2/18

602

12

12

2 0 0

Rowan Relentless

Q2 2015

6/17

582

Off rate

(3d)2Q'16

DP trials

12

6

0 0 0
Sub-total 1 48 32 2 0 0
Click to enlarge

Jackups

Name

Contract

End

Current

Day rate

K $

2016 2017

2018

2019 2020

Rowan Gorilla IV

1986

1/16

1/16 - 11/16

70

70-75

11

0

0 0 0

Joe Douglas

2012

2/16

231

(31d) 1Q'16

1

0

0

0 0

Bob Keller

2005

5/24

120/178

Lower rate until 3/16

12 12 12 12 53

Hank Boswell

2006

8/18

163/180

Lower rate until 3/16

12 8 0 0 0

Scooter Yeargain

2004

11/18

163/180

Lower rate until 3/16

12 11 0 0 0

Bob Palmer

2003

8/17

198/235

Lower rate until 3/16

(31d) 2Q'16

11 8 0 0 0

Arch Rowan

1981

9/18

69

(45d)1Q'16 Inspection

10.5 9 0 0 0

Charles Rowan

1981

9/18

69

2Q'16 (45d)

10.5 9 0 0 0

Gilbert Rowe

1981

11/15

Drilling for Saudi Aramco probably on a 1-year price option - To be confirmed

106 69? 11 0

0

0 0

Rowan Mississippi

2008

12/18

195 12

12

0 0 0

Rowan California

1983

9/16

144 9

0

0 0 0

Rowan Middletown

1980

9/18

69 12 9

0

0 0

Rowan Norway

2011

7/16

363 7

0

0

0 0

Rowan Viking

2011

1/16

1/16-2/17

350

360
12

2

0 0 0

Rowan Gorilla V

1998

8/16

175 8

0

0

0 0

Rowan Gorilla VI

2000

3/18

355 12

12

3

0 0

Rowan Gorilla VII

2002

12/16

181

(45d) 3Q'16

10.5

0

0 0 0

Rowan EXL IV

2011

Inspection

0

0

0

0 0

Rowan EXL II

2011

3/17

180 12 3

0

0 0
Sub-total 2 185.5 95 15 12 53
Click to enlarge

The backlog is estimated at $3.7~ billion as of January 2016.

Cold Stacked/retired rigs.

# Name Year built Location
1 Rowan Louisiana 1975

Sabine Pass Texas

2 Cecil Provine 1982

Sabine Pass Texas

3 Rowan Gorilla II 1984 Malaysia
Click to enlarge

Warm Stacked/Ready Stacked/ Available.

# Name Year built Location
1 Ralf Coffman 2009 Malta move to US GoM
2 Rowan Stavanger 2011 North Sea UK
3 J.P. Bussell 2008 Bahrain
4 Rowan EXL I 2010 Malaysia
5 Rowan Gorilla III 1984 US GoM
6 Rowan EXL III 2011 US GoM
Click to enlarge

Financial Snapshot:

3 first quarters of 2015 results.

Q3 2015 Q2 2015 Q1 2015

Revenue in

$ Million

545.4 508.7 547.1

Net Income in

$ Million (1)

111.4 84.7 123.7

Contract drilling expense

in $ million

247.6 253.9 255.7

Direct rig-related daily Opex

$ million

235.8 240.8 245.4

Net cash provided by operations

$ million

658.9 307.8 140.9
EPS in $ (1) 0.89 0.68 0.99
G&A in $ million 29.7 31.2 27.6

Interest expense

in $ million

42.9 30.5 33.6
Dividend $/Q 0.10 0.10 0.10

Shares Outstanding basic

in Million

124.8 125.4 125.1
Cash and Cash equivalent in $ Million 290.5 198.6 56.8

Non-cash impairment charge

$ million

329.8 0 0

Long-term Debt

$ Billion

2.8067 2.8069 2.8071
Stock price Nov. 3, 2015 in $ 20.62 17.68 22.84
Enterprise Value $ Billion 5.21 4.85 5.6
Adj. EBITDA $ Million 265.9 223.3 264.2
EV/EBITDA 5.21 5.07 5.28
Click to enlarge

Revenues estimated in 2015 will be approximately $2,145 million.

Commentary:

Rowan Companies, is an offshore driller that I find particularly interesting, because it presents some real strength, but also some obvious weaknesses, that we should not ignore before investing long-term, especially in light of the collapsing oil situation.

Rowan was essentially a jackup driller until 2014, when it started its deepwater drilling business, with four new drillships all contracted and working now. It was one of the lucky ones in this business and manage to build rigs already contracted.

Rowan contract backlog, strength and weakness.

Rowan contract backlog is a strong element of strength for the company, and we can confirm that the situation is practically "in control" for 2016 and even 2017, assuming a minimum tendering next year which is still possible through a "blend & extend" negotiation.

However, when we look at the details, on the floater segment, the situation is rapidly degrading starting mid-2017 and 2018.

Practically the whole floater fleet will roll off contract from 4/2017 to 2/2018 with a big unknown after that, depending mainly on eventual contract extensions at a reduced day rate.

Furthermore, the company indicated in the last results report, that it has been in discussion with all four of its UDW customers, for a type of "blend & Extend" renegotiation, which is still ongoing, right now.

Thus, we should learn during the 1Q'16 about some new extensions with a lower day rate as a key. The discussion is actually at a different stages and involved Repsol, Anadarko, Cobalt and Freeport-McMoran.

We all know that Freeport-McMoran reported recently, its desire to exit the offshore drilling business, and I commented on this subject on December 26.

We learned that Freeport-McMoran has retained investment bank Lazard to advise on a possible sale of the company's entire oil and gas interests. The company paid over $20 billion for the oil and gas assets and expects selling the whole package for $3 billion.

On December 23, 2015, Upstream reported the following about mining giant Freeport-McMoRan:

The assets could be worth more than $3 billion, the Reuters sources said... A sale would mark the first concrete steps in ending Freeport-McMoRan's poorly timed foray into oil and gas. The company said in October that it would explore strategic options for the assets, including a spinoff, joint venture or public offering. Freeport-McMoRan's oil and gas division includes assets in the deep-water Gulf of Mexico, onshore and offshore assets in California and in the Haynesville gas shale, along with other natural gas assets in Louisiana. It has already announced plans to significantly scale back operations in the US Gulf and said it will reduce its rig fleet from three to one next year.

This news involves the UDW Rowan Relentless indicated above.

The oil situation has now reached a concerning level, and I am sure the renegotiation will be extremely tough in this torrid situation. I expect a significant day rate reduction or 40%, at least, with a 1-year or 2-year extension, in the best case scenario. This could affect strongly future revenues on the down side, but will give more contracting time which is essential for Rowan which will be struggling with four new drillships in 2017/2018.

On the Jackup side, the situation basically the same. A good contract backlog until 2017 and then not much visibility, after that. Rowan has a very good presence in the middle East and should be able to keep a certain level of business there. However, the jackup oversupply is a huge concern and will need to be solved by the industry very soon.

The company is moving the JU Ralf Coffman to the US GoM and has moved the JU JP Bussell from South East Asia to the Middle East. This move is implemented when the company fails, it has a good chance to contract the rig in another new location. But, so far, we haven't heard of any new contract in this segment.

I indicated the JU Gilbert Rowe as drilling even so the rig rolled off the contract end of last year, and I assume that Saudi Aramco exercised the 1-year option at a day rate of $69k/d.

As always, the immediate situation is quite comfortable and Rowan will not experience financial problems, which makes me think the company will probably survive this bear cycle. The net debt is about $2.5 billion.

The debt situation is manageable with a debt to capitalization ratio of 38% in 3Q'15 and 37% in 2Q'15 and from the last 10Q filing.

Financing Activities Borrowings - We have a revolving credit facility with a current aggregate maximum capacity of $1.5 billion. The facility has an accordion feature that may permit us to increase the borrowing capacity to $1.75 billion, subject to obtaining lender commitments. The maximum amount of draws that may be outstanding is $1.5 billion through January 22, 2019, and $1.44 billion thereafter through the final maturity date of January 23, 2020.

Debt compliance and other - Restrictive provisions in our credit facility limit consolidated debt to 60% of book capitalization. Our consolidated debt to total capitalization ratio at September 30, 2015 was 38% . We were in compliance with our debt covenants at September 30, 2015 , and we do not expect to encounter difficulty complying in the following twelve-month period.

Conclusion:

Rowan is a well managed offshore driller caught in an unprecedented perfect storm. The company will probably financially survive 2016 without a major problem, albeit, It will have to renegotiate all its current drilling contracts, especially for the four UDW, at a lower day rate to secure a bonus extension. The question is 2017 and beyond?

Oil prices are again of a paramount importance in your decision to invest in the offshore drilling sector, and I agree with Cowen when he said that he find "no compelling reason to invest", right now.

With oil prices reaching the low 30's, the industry is not going to survive for long, this is the sad reality. Most of the oil producers, offshore and onshore, need at least $65 a barrel to barely break even. CapEx has been slashed by $250 billion in 2015, and probably another $80 billion in 2016. At this rate, we only replace 8 billion barrels of oil from the 34+ billion barrels of oil we consume per year, worldwide. Furthermore, Freeport-McMoran, ConocoPhillips and a few others seem to exit the deepwater business to focus on cash flow and survival.

On a final note, Rowan will probably suspend dividends, there is no doubt in my mind. The move will probably put even more pressure on the price per share.

However, the question is when oil will finally turn bullish again? It is not whether it will or not, but rather when. The market is selling off the entire oil industry, because of an evident lack of visibility, and the effect of an usual negative momentum that feed from fear and emotion.

I am sure it will be a time soon, when it will be a buying opportunity but not right now. It is safer to wait until oil prices will stabilize.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I trade RDC and I have a small recent long-term position