Rowan: Tides Still Not Lifting All Boats
Summary
- Rowan, one of the highest-quality offshore drillers, reported 4Q17 results that failed to inspire investors.
- It looks like macro factors have capped the company's ability to produce more revenues, while expenses have already been stripped to the bone.
- Investing in offshore drilling today is like ice fishing while wearing a long-sleeve shirt: either you catch a fish or you risk freezing to death.
Squeeze it as you may, there just isn't enough money to be made in offshore drilling nowadays.
Supporting the idea is Rowan Companies (NYSE:RDC), whose 4Q17 result released earlier this week failed to impress investors. Revenues of $296.7 million actually beat consensus by the widest margin since 2Q16. But still, it is hard to celebrate a 16% YOY top line drop recorded over the easiest comps since the start of the crude oil downcycle. A sizable non-GAAP per share loss of -$0.31 landed a penny below expectations, after adjusting for a one-time gain from asset sales.
Credit: The Business Journals
Rowan's JU (jackup) business, the company's largest on a revenue basis and representing 56% of the top line results ex-eliminations, dipped 13% YOY. JU utilization remained stable at a healthy 77% that was significantly better than last year's 63%. But the average dayrate of $123,300 was substantially lower than year-ago levels by over 20%. I doubt that this dynamic of solid utilization reached through deeply discounted pricing will change much in the foreseeable future, considering oil producers need the economic incentive to maintain drilling activity at healthy levels.
Not surprisingly, costs remained stable sequentially, with drilling expenses coming in flat versus 3Q17 due to about 70% of Rowan's total rig days being productive. SG&A inched up in the quarter but ended the year largely unchanged compared to 2016, suggesting Rowan might have done all it can to produce operating leverage at this point.
On the balance sheet, Rowan still looks very solid, with net debt levels of $1.18 billion comparing favorably against last year's $1.42 billion (the company's book value of equity is $5.4 billion, for reference), supported by capex of $101 million in 2017 that was lower than 2016's $118 million and CFOA that remained well above water (pun intended).
On the stock
In my view, investing in offshore drilling today is like ice fishing while wearing a long-sleeve shirt. Sure, a beautiful and meaty fish could bite the bait (i.e. crude oil may head up substantially and finally stay higher, dragging with it battered OSD stocks). But the longer you wait patiently for your successful catch, the closer you get to freezing to death.
As I have argued recently, I believe companies engaged in underwater drilling services will likely be the last to benefit from a sustainable increase in crude oil demand. For example, onshore activity in the U.S. has been very strong, with some smaller ESPs enjoying capacity utilization levels of 100%. But depressed dayrates suggest the drilling economics need to be very favorable to E&Ps for service providers to remain busy. Because a barrel of oil produced under water tends to be pricier, I don't expect players like Rowan and its direct peers to see the light at the end of the tunnel until the downcycle can be clearly seen in the rear view mirror.
RDC EV to EBITDA (Forward) data by YCharts
| Ticker/Company | EV/EBITDA | P/Tang. Book | P/TTM FCF |
| Rowan - RDC | 17.3x | 0.29x | 4.5x |
| Transocean (RIG) | 7.6x | 0.33x | 5.5x |
| Ensco (ESV) | 15.6x | 0.22x | 3.2x |
| Noble (NE) | 13.7x | 0.18x | 3.2x |
| Diamond (DO) | 9.1x | 0.53x | 5.6x |
Source: Table compiled by DM Martins Research, data from YCharts
In the past, I have been relatively more accepting of an investment in RDC than in pretty much any of its larger competitors due to it being perhaps the highest-quality driller out there. But the macro forces, in my view, are much more relevant than company-specific factors when it comes to investing in the space. For this reason, I choose to stay away from RDC and all other names in the industry at this moment.
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This article was written by
Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.
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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.
He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.
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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.
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Analyst’s 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.
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Comments (16)
Everyone gets excited when some floater gets a contract- the point is that those contracts are on bargain day rate,hardly covering driller's expenses.
People gets excited seeing this rig or another is going to drill a well and projects rosy expectations. It is too early, to many rigs cold stacked and day rates are piss poor.
I would counter with:
- cash flow positive
- loss in quarter. But you pay way < book. Plus by selling assets > book they generated a lot of value
- aro will be a HUGE company. No other driller has anything that comes close
- RDC have an enormous cash balance
- fleet expanded
- they expect nearly full utilization of the jack up fleet
- they think the UDW mkt is improving, albeit slowlyI am long rowan. But for good reason. They are the only driller with any form of positive catalyst (aro JV) and are o/wise in a fine position.
Tw
They missed by 1c. They incurred expenses from aro & the attempted maersk purchase.
Also they have 1 rig on “high dollar contract”.
I agree they did make a loss, excluding the one off.