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Rowan: Tides Still Not Lifting All Boats


  • 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).

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This article was written by

DM Martins Research profile picture

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.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

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)

How hard is to understand that you should not expect a good earnings from companies operating on the edge of operation costs?
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.
Thewaltzy profile picture
It’s easy to understand that.
But not for everyone. 😃
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.
Looking to start a position In RDC at lower levels.. Started with ESV..
canyonwlf7 profile picture
Agreed, Rusty, I'm in ESV at 4.5 average
I would be careful about touting Rowan's large Book value of equity. it looks impressive but one has to remember that they have been very very slow to retire their aging assets. I have seen references in Industry articles indicating that some of vthe gorilla line is obsolete and needs to be retired. if and when that happens Book value of equity will take a big hit as it has with other Drillers who have been more realistic in scrapping and writing off assets. I like the chart that the author included in this article and it speaks volume about why Rowan is so expensive on an Eevee to Eva. Basis compared to its peers; particularly Transocean and Diamond Offshore. I honestly can't see how RDC should command such a premium to its offshore drilling piers with its backlog declining significantly and it's large percentage of stacked rigs which are rusting as we speak. it has some positives clearly like relatively low net debt and its joint venture with Saudi aramco. but I don't believe for a minute that it is Best in Class of the offshore Drillers.
WhyNotBuy profile picture
Good article but the metaphors need some work. IMHO
DM Martins Research profile picture
Ha! Sure, I think they do as well.
Taymere profile picture
DM, Love the ice fishing metaphor, you got my follow for that.
Thewaltzy profile picture
Fair response. I suppose I think it would be fairer to include all the points. (My opinion)
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 slowly

I 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.
DM Martins Research profile picture
Sounds good. I have always been more impressed with RDC than the other names in the space -- I have written several pieces detailing some of the reasons. I am just really not enamored with the macro landscape. Investors have been waiting too long for things to turn around, and I am not sure that we are now at an inflection point.

Thanks for the input!
johnny..cage profile picture
DM - It’s been long discussed recovery begins H218. It’s well on track contracting is greatly accelerated. Investor sentiment in the oil space is another thing. Another reason why KSA and friends will run inventory down to nothing prior to IPO launch. They would also like US shale to reach peak capacity. OPEC also looks like it will run under 32 by July. You can see the stories building, Cushing empty, OPEC capacity on life support, shale not filling the gap, demand sky high. Algo’s I will say are absolutely killing us though causing fear/panic.
Thewaltzy profile picture
Any comments on aro? Or the actual profit this quarter? Or the new contract for exl 3 or the 4 new expected contracts for the idle rigs? Or the 2 pbr rigs bought? Just curious.
DM Martins Research profile picture
Sounds like a whole new article could be written on all those topics... ;-)

In general and in my opinion, news on contract extensions or idle rigs coming back on are less of a factor for the investment thesis than the fact that dayrates continue to be very depressed and likely to cap revenues. Throughout the downcycle there was scattered activity (with pockets of complete silence), but that did not mean a turnaround was in the works. On the actual profit for the quarter, I don't think the asset sale that drove it will be a meaningful part of the discussion, as operationally Rowan still produced a pretty sizable net loss.

Of course, these are just the thoughts I have. Much more could be written on these subjects -- and maybe they will, by the other contributors that follow the OSD space. Thanks!
David_MV profile picture
Profit this quarter actually missed if you remove the one time gains from the sale of rigs to Aro. High dollar contracts continue to roll off replaced by break even or just above. This does nothing to increase earnings.

This was bound to happen. Henrick and others have been accurately predicting falling earnings despite some scant pickup in tendering. The market obviously agrees that this is a bad quarter. Welcome to stagnant earnings growth as they struggle to achieve positive cash flow in the face of overwhelming debt expense.
Thewaltzy profile picture
Be fair:
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.
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