(Source: Seeking Alpha)
Rowan Companies plc (NYSE:RDC) provides offshore oil and gas contract drilling services. The company operates a fleet of 29 mobile offshore drilling units, including 25 jack-up rigs and 4 ultra-deepwater drill ships. Of the 29 units, 7 rigs are idle and an additional 2 have been cold stacked. The company operates in the U.S. Gulf of Mexico, the UK, the North Sea, the Middle East, and Trinidad.
(Source: Seeking Alpha)
The downturn in the oil sector hasn't affected RDC's stock price as much as other companies in the offshore drilling market such as Diamond Offshore Drilling Inc. (NYSE:DO) and Noble Corporation plc (NYSE:NE). For the last year, the stock price for RDC has been neck-and-neck with the aggregate Oil & Gas Drilling subindustry, which includes land drilling.
RDC has initiated a joint venture with Saudi Aramco with a significant portion of Saudi Aramco's rig requirements. This venture will ensure the company's survival and longer term prospects in this difficult economic environment.
RDC has managed to stay afloat in 2016 with an adjusted net profit of $0.08 per share in Q4 and $2.11 for the entire year, despite rapidly falling revenues. Legacy higher-margin contracts are still providing much-needed cash flow.
The table below highlights how RDC stacks up against the GICS Energy Equipment & Services industry.
Note that the industry includes companies that supply oil and gas equipment and services other than drilling.
RDC wins hands down on just about every fundamental factor, whether it be valuation, returns, or margin. But of course, the fundamentals are rear-view mirror statistics that don't necessarily apply to the future in the rapidly changing oil drilling market.
Analysts expect that RDC will be operating in the red in 2017 as contracts wind down and rigs become idle. Even so, RDC's future appears to be relatively stable given the joint venture with Saudi Aramco, and debt maturity obligations pushed out until 2022 and later. Survival mode will be the norm for many years to come, a lot longer than the average investor assumes.
Sales and EPS have mostly beaten analysts' estimates, sometimes by a wide margin. This generally means that the company provides conservative forward guidance. The message here is that investors should not fear large negative surprises come reporting time.
The average recommendation for RDC is 2.9 on a scale of 1 to 5 with 1 being a 'Buy' and 5 being a 'Sell'. The average recommendation has been steadily rising, which is reflective of the general state of the oil and gas drilling segment.
The stock short interest is a whopping 20.9% of float. Short interest is a good gauge of future price direction. However, a short squeeze could occur if the stock price spikes up for any reason.
The stock price has been in a downward trend since December 2016. The stock price is currently $15 and if the downward trend continues the price could reach the initial support level of $12.50. The second support level is at ~11.25.
Investing in Rowan Companies plc
At present, investors should avoid RDC until the stock price drops below $14.00. Do not chase this stock if it rises in price. Below $14, long-term investors could consider building up a position in RDC slowly with the understanding that the price could easily fall to $11.25 or lower. This should be treated as an investment with an ultra-long-term horizon of 20 years.
The major risk would be if the joint venture with Saudi Aramco falls through. Another risk is if a long-term contract is cancelled without compensation.
RDC operates a fleet of 29 mobile offshore drilling units, including 25 jack-up rigs and 4 ultra-deepwater drill ships. Of the 29 units, 7 rigs are idle and 2 have been cold stacked.
RDC fundamentals are superior to the industry aggregate, with better valuation, returns, and margins. As with the rest of the industry, RDC is expected to lose money in 2017.
Sales and EPS have generally beaten analysts' estimates, sometimes by a wide margin. This generally means that the company provides conservative forward guidance.
There is a high level of short interest meaning that speculators are pessimistic about RDC's prospects. Short interest is a good gauge of future price direction.
RDC should be avoided until the price drops below $14 then investors should consider accumulating RDC stock with a long-term investment horizon of 20 years.
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.