Is Rowan And Saudi Aramco's New 50/50 Joint Venture A Game Changer?

| About: Rowan Companies (RDC)

Summary

On November 21, 2016, Rowan Companies and the Saudi Arabian Oil Company (Saudi Aramco) have signed an agreement to create a 50/50 joint venture.

It was an important deal almost unnoticed by the public and needs to be seriously analyzed.

Rowan/Aramco JV is only a start, and could eventually grow in size, which will tremendously cut down the market for other competitors.

The Jack-up Joe Douglas

Source: Company website

This article is an update of my preceding article on Rowan Companies (NYSE:RDC) on November 21, 2016.

Presentation

On November 21, 2016, Offshore Energy Today indicated the following:

Offshore driller Rowan Companies and the Saudi Arabian Oil Company (Saudi Aramco) have signed an agreement to create a 50/50 joint venture to own, operate, and manage offshore drilling rigs in Saudi Arabia.

According to the agreement signed through subsidiaries of the two companies, the new joint venture company will use Rowan's business in Saudi Arabia as its base with a scope of operations covering Saudi Arabia's existing and future offshore oil and gas fields. The new company is anticipated to start operations in the second quarter of 2017.

At the beginning of operations of the new company, Rowan said it will contribute three of its jack-up drilling rigs and Saudi Aramco will contribute two of its jack-up drilling rigs. Rowan will contribute an additional two jack-up rigs as they complete their current Saudi Aramco contracts in late 2018.

The new company will also manage the operations of five Rowan jack-up rigs currently in Saudi Arabia, until their associated drilling contracts expire, which then may be released, leased by or contributed to the new company thereafter.

In addition, Rowan and Saudi Aramco have committed the new company to purchase future newbuild rigs that will be constructed in Saudi Arabia.

It was an important deal almost unnoticed by the public. In fact, Rowan's stock was flirting with its lows at the time of the news.

Yet, it was a deal of importance that could spell real trouble for many other offshore drillers, such as Noble (NYSE:NE), Ensco (NYSE:ESV) or a dozen others, in a very strategic location for jack-ups.

A quick presentation of the jack-up fleet in the Middle East.

1 - The jack-up fleet worldwide.

On January 8, 2017, Seeking Alpha published one of my articles about the jack-up fleet worldwide (the count as of February 12, 2017, has changed a little since then, and now is about 630 rigs).

Basically, the jack-up segment represents a total of 633 rigs including the ones under construction (102).

Note: InfieldRigs and Rigzone indicate a rig count now down to 630 rigs.

The main categories are as follows:

  1. Working rigs (301)
  2. Cold stacked rigs (51)
  3. Ready stacked rigs (170)
  4. Standby/idle rigs (under contract but inactive) (1)
  5. Under inspection for repair or five-year SPS/Shipyard (8)
  6. Under construction (102)

Excluding the "under construction" segment, we have 531 rigs actually in the market and drilling, ready to drill or waiting to drill. Actually 47.6% of these rigs are working/contracted and are receiving a day rate from a client. The others are moored and idle in different states of maintenance.

2 - Repartition of the 124 jack-ups active in the Middle East.

Note: Others include Azerbaijan and Turkmenistan.

Early January, I counted 46 jack-ups classified as active in Saudi Arabia. Almost as much as UAE and Iran combined.

We see, first hand, how impactful a new deal like that can turn out for the offshore industry. It is, of course, a very good deal for Rowan, but a source of worry for the rest of its competitors with a significant fleet actually contracted on a long-term basis.

As a reminder, Noble Corp. and Ensco have together 10 jack-ups working for Saudi Aramco or 21.7% of the total.

Note: NE and ESV are NOT the only offshore drillers working for Saudi Aramco, Seadrill (NYSE:SDRL) with its three AOD subsidiaries, and others are working for the company as well.

Jack-up End contract

Backlog estimated remaining

in $ million

Noble Gene House 11/18 45
Noble Joe Beall 11/18 43
Noble Roger Lewis 3/22 295
Noble Scott Marks 7/22 315
Ensco 97 2/19 90
Ensco 96 2/19 71
Ensco 88 12/19 68
Ensco 84 8/21 119
Ensco 76 12/18 114
Ensco 54 9/17 36

Noble/Saudi Aramco backlog is $698 million and Ensco/Saudi Aramco is $498 million. Total $1.196 million.

3 - Rowan situation before the deal.

Jack-up End contract

backlog estimated remaining

in $ million

Bob Keller 5/24 347
Hank Boswell 8/18 100
Scooter Yeargain 11/18 116
Bob Palmer 8/17 43
Arch Rowan 9/18 40
Charles Rowan 9/18 40
Gilbert Rowe 12/16? ? New contract unknown
Rowan Mississippi 12/18 149
Rowan Middletown 9/18 40

RDC/Aramco backlog is $875 million.

What is the deal?

This agreement is creating a joint venture owned by Saudi Arabia and RDC 50%/50%.

The new joint venture company will use Rowan's business in Saudi Arabia as its base with a scope of operations covering Saudi Arabia's existing and future offshore oil and gas fields.

Rowan will contribute three jack-ups and Saudi Aramco two Jack-ups for an initial total of five jack-ups. Rowan will contribute an additional two jack-up rigs as they complete their current Saudi Aramco contracts in late 2018.

Rowan said the rigs would receive contracts for an aggregate 15 years, renewed and re-priced every three years, provided that the rigs meet the technical and operational requirements of Saudi Aramco.

Rowan has four Jack-ups stacked in Bahrain that could be used immediately - the JU Rowan California (1983) may not be included and may eventually be scrapped?

Which means the JU J.P. Bussell and the Rowan EXL I and IV. The JU Gilbert Rowe ending its contract in December could be also a potential? Plenty of potential.

The two jacks-ups ending in 2018 could be the JU Arch Rowan and the JU Charles Rowan, but it could be others looking at the rigs' old age? Reuters article gives more information:

Both companies would contribute $25 million as working capital, Rowan said in a regulatory filing on Monday.

Rowan will supply two more rigs in late 2018 and Saudi Aramco will make a matching cash contribution.

The new JV will also manage "the operations of five Rowan jack-up rigs currently in Saudi Arabia, until their associated drilling contracts expire, which then may be released, leased by or contributed to the new company thereafter."

Conclusion

On February 7, 2017, Bassoe Offshore published an excellent article about this particular JV and its implication:

Why did SA do it?

In December, Saudi Aramco announced that they had entered into "landmark" joint venture agreements with Nabors and Rowan "to create two new national champions focused on onshore and offshore drilling." CEO Amin H. Nasser stated that "these initiatives represent an unprecedented new large scale model of collaboration, with substantial value creation for both Saudi Aramco and its partners through a closer working relationship. These investments are part of a wider program to leverage our core activities, to help enable the sustainable development of the Kingdom's economy through diversification, and the development of an internationally competitive and dynamic local energy sector, supported by national champions."

Note: The same 50/50 JV was created on October 31, 2016, with Nabors Industries (NYSE:NBR).

The deal strengthens Rowan's position in the region and should be considered a significant opportunity and platform for growth.

I have to agree with base here. RDC will have nine jack-ups in this JV and it guarantees a long-term commitment and a serious part of the "Aramco business". Saudi Aramco has two jack-ups - SAR-201 (1982) and SAR-202 (2012) - for a total of 11 rigs in the JV.

The problem for the other drilling contractors is that there is risk that the joint venture will grow and more rigs will be pushed out of the Kingdom. In addition, and assuming the Saudi rig market only grows modestly, the prospect of 20 newbuild rigs being phased in over 10 years could contribute to a steady outpouring of rigs from Saudi into other Middle Eastern countries which already have an oversupply of jack-ups. In effect, the joint venture will make the largest jack-up market in the world smaller for everyone else but Rowan.

Once more, good comment here. RDC/Saudi Aramco JV is only a start, and could eventually grow in size, which will tremendously cut down the market for other competitors.

However, what the author is not considering is that Ensco or Noble can still create eventually the same JV with Saudi Aramco considering the nature of the relation they have and the long-term contracts already in place (See list of jack-ups above).

Important note: Do not forget to follow on RDC, NE and ESV. Thank you for your support.

Disclosure: I am/we are long RDC, ESV.

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 am waiting for a better price for NE to restart a new long position.

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