Rowan Companies - Saudi Aramco Joint Venture Supports Future Earnings

| About: Rowan Companies (RDC)

Summary

Even with its recent stock price recovery, Rowan Companies' present stock price is still noticeably below the company's pre-crash price.

Rowan Companies has an incredibly impressive fleet well spread across the world. The company also has a $2.2 billion backlog that will help its future earnings.

Rowan Companies' recent joint venture with Saudi Aramco will supply the kingdom's future drilling needs and provide Rowan Companies with long-term income growth.

Rowan Companies' (NYSE: RDC) stock price has had a difficult time since the start of the oil market crash. Despite these difficulties, Rowan Companies, as an offshore driller with a market cap of just under $2.5 billion, still has a significant position in the offshore drilling market. At the same time, the company has recently managed an incredibly strong deal with Saudi Aramco. The combination of this Saudi Aramco deal along with a recovering offshore drilling industry shows Rowan Companies' future potential.

Introduction

Rowan Companies plc is an American offshore drilling contractor that provides drilling services to the offshore petroleum drilling industry. The company is headquartered in Houston, Texas, the oil industry capital of the United States. The company, with a market cap of just under $2.5 billion, is one of the larger drilling contractors with several dozen rigs. The company also employs a total of 3100 employees, employees it has continued to support throughout the drilling crash.

Rowan Companies Drilling Rig - Rowan Companies

Rowan Companies has had an incredibly difficult time since the start of the market crash in mid-2014. Rowan Companies' mid-2014 stock price peaked at more than $32.5 per share. From that point, the company's stock price dropped by roughly 65% to a February 2016 stock price of just over $11 per share.

Since this bottom, Rowan Companies' stock price has recovered by more than 70% to the company's present stock price of more than $19 per share. Despite this impressive recovery, partially due to the company's impressive Saudi Aramco deal, the company's stock price is still 60% of the company's pre-crash. As we will see, Rowan Companies still has impressive stock price recovery potential.

Rowan Companies' Overview

So far, we have an introduction to Rowan Companies including why the company is a strong investment at the present time from the Saudi Aramco deal along with the company's future potential. Now, it is time to begin by discussing Rowan Companies overall.

Rowan Companies Transformation - Rowan Companies' Investor Presentation

Rowan Companies has been evolving as a company over time. From pre-2004, the company was an offshore drilling jackup-only company focused on land drilling. The company also provided drilling equipment manufacturing, aviation, and barge tow services. From 2004-2015, the company acquired Skeie Drilling and completed a massive $3 billion newbuild program including 11 high-spec rigs.

From that point, Rowan Companies moved into the ultra-deepwater drilling rig industry. Ultra-deepwater rigs are expensive; the company spent $3 billion on 4 ultra-deepwater drillships. These expensive ships each cost as much as almost 3 of the high-spec jackups. However, these rigs also tend to achieve multi-year contracts. These multi-year contracts can last through a long, drawn-out oil crash.

Rowan Companies Fleet - Rowan Companies' Investor Presentation

Rowan Companies has since grown into an offshore drilling company at the top of the offshore drilling markets. The company has managed drilling in high temperature environments, at incredible temperatures, and at incredible depths. The company currently operates rigs across the world with significant operations in the Gulf, North Sea, the Middle East, and Southeast Asia. As we can see, Rowan Companies currently has an impressive market position with a significant asset base.

Rowan Companies Fleet Positioning - Rowan Companies' Investor Presentation

This image shows how Rowan Companies' fleet of 28 rigs is spread across the world. The company has 13 of its jackups in the Middle East, the most active drilling region in the world and where the company achieved its recent Saudi Aramco deal. At the same time, the company also has harsh environment jackups in the North Sea with incredibly significant operations in both the Gulf of Mexico and Central & South America.

Taking a picture of Rowan Companies' fleet locations and we can see that the company has a fairly impressive fleet. More importantly, the most significant portions of the company's fleet are located in the US Gulf of Mexico and the Middle East. Both of these are major drilling regions with stable markets. That means Rowan Companies' income from these regions should be consistent. However, the North Sea is a region of higher expenses, and as a result, the company's contracts here might be in jeopardy.

Rowan Companies' Saudi Aramco Partnership

Now that we have an overview of Rowan Companies including a detailed overview of the company's transformation and the company's fleet, it is now time to move on to a discussion of the company's recent deal with Saudi Aramco.

Saudi Aramco Rowan Companies Partnership - Rowan Companies' Investor Presentation

Saudi Aramco's partnership with Rowan Companies ensures long-term growth. Saudi Aramco and Rowan Companies are joining together to make a new drilling company in which they each own a 50% stake. Saudi Aramco, also, as a multi-trillion dollar oil company and the largest oil company in the world will provide a continued source of drilling rig demand for Rowan Companies.

At the same time, economies of scale, will provide significant additional income for Saudi Aramco and Rowan Companies. The new company will mass-produce offshore rigs for Saudi Aramco with long-term contracts. These long-term contracts will provide a significant portion of Saudi Aramco's long-term rig requirements and provide Rowan Companies with significant long-term income. These long-term contracts will help support Rowan Companies and how the company is a strong investment.

Rowan Companies Partnership Overview - Rowan Companies' Investor Presentation

The above slide provides some more detail about the Rowan Companies and Saudi Aramco deal. The companies will form a 50/50 joint venture to own and operate jack-up rigs in Saudi Arabia. In 2017, Rowan Companies will contribute 3 rigs while Saudi Aramco will contribute 2 rigs and cash. In 2018, Rowan Companies will contribute 2 rigs as they roll off contract and Saudi Aramco will contribute more cash.

At this point, the new company is anticipated to be self and externally funded. Both companies are committed to progressively implementing efficiencies and costs and expect returns to be commensurate for Rowan Companies. As a result, the joint company will enter 2020 with what will effectively be zero debt, half a dozen rigs, and significant cash assets.

These rigs will have access to long-term contracts with Saudi Arabia's offshore drilling industry. Saudi Arabia's major Ghawar Field, which produces roughly half of the country's oil output, is running out and will need to be replaced. Saudi Arabia will likely turn to the offshore drilling to do this providing the new company with a number of long-term contracts.

Rowan Companies Partnership Overview Part. 2 - Rowan Companies' Investor Presentation

In fact, the new company anticipates that it will need as many as 20 rigs from 2021 to 2031 to meet the base offshore drilling demand for Saudi Arabia. The rig purchases will be supported by long-term contracts meaning the company will not have the fear of rigs being stacked. Not having to worry about rigs being stacked will help the combined company's long-term earnings.

Overall, the company will be 50% owned by Saudi Aramco and 50% owned by Rowan Companies. Given that Saudi Aramco is consistently looking to increase long-term profits, Saudi Aramco's stake in the combined company means it will likely go to the combined company for contracts. That means that the combined company will be the one-stop shop for all of Saudi Aramco's oil drilling. This will significantly help Rowan Companies' long-term earnings.

This proves how the Saudi Aramco joint venture is an important source of long-term profits for Rowan Companies.

Rowan Companies Backlog And Financials

Now that we have discussed Rowan Companies in detail along with an understanding of the company's Saudi Aramco partnership, it is now time to finish up by discussing Rowan Companies' backlog and financials.

Rowan Companies' Backlog - Rowan Companies' Investor Presentation

Rowan Companies has a total backlog of $2.2 billion with key competitive advantages. The company has a very modern, high specification fleet with deep customer relationships. This backlog is one of the longer backlogs in the offshore drilling industry and is split across the Middle East and the Deepwater industry.

As we saw in our Saudi Aramco partnership discussion above, Rowan Companies has an impressive relationship with Middle Eastern oil. The company has a significant backlog here, and this, along with the internship, will continue to support Rowan Companies' long-term earnings.

Rowan Companies' Cash, Credit Facilities, and Debt - Rowan Companies' Investor Presentation

Rowan Companies has the longest runway of all publicly traded offshore drillers with its present $1.2+ billion cash flow enough to exceed all debt maturities through 2021. The company's many peer group credit facilities will expire prior to significant debt maturities and capital commitments.

As we can see here, Rowan Companies' financial position is noticeably better than that of the other offshore drillers and is enough to handle a long-term market crash.

Rowan Companies' Debt Maturity Schedule - Rowan Companies' Investor Presentation

This provides a stronger overview of Rowan Companies' balance sheet. The company's impressive balance sheet allows the company to invest counter-cyclically taking advantage of the rapid market drop in the offshore drilling industry. In fact, Rowan Companies, should it choose to, could acquire some of Seadrill's (NYSE:SDRL) top of the line drilling rigs. Acquiring these drilling rigs would provide much-needed cash to Seadrill while noticeably improving Rowan Companies' fleet.

Rowan Companies acquired $150 million of debt since 4Q 2015 saving the company $10 million in annual interest expenses. The company choosing to repurchase 2017 and 2019 debt could save the company another $50+ million in annual interest expenses. At the same time, the company has a $1.5 billion revolver. This revolver would allow the company to make additional acquisitions in this downturn increasing its long-term earnings potential.

Conclusion

Rowan Companies has had an incredibly difficult time since the start of the market crash. The company's stock price bottomed out in early-2016 and since then, the company's stock price has had a respectable recovery. However, the company's stock price is still noticeably below its pre-crash peak. Despite these difficulties, Rowan Companies continues to have a top of the line fleet with a very respectable $2.2 billion in backlog that will provide the company with future income.

At the same time, Rowan Companies' Saudi Aramco joint venture, a 50-50 deal with Saudi Aramco, will provide the company with impressive long-term income. This joint venture means that this new company, which Rowan Companies has a 50% stake in, will provide all of Saudi Aramco's offshore drilling needs. Given that Saudi Aramco's major Ghawar Field is running out, the country will turn increasingly towards offshore drilling. This will significantly help Rowan Companies' long-term earnings.

As a result of these things, Rowan Companies is an impressive investment at the present time.

Disclosure: I am/we are long RDC.

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.

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