Rowan (NYSE:RDC) was the last driller to report its quarterly results this earnings season. Without further ado, let's look at the performance of one of the leading drilling companies and its outlook for the future.
Rowan reported net income of $112 million or $0.89 per share, which included a $151.7 million gain on the sale of assets to ARO Drilling, the company's joint-venture with Saudi Aramco. Going forward, ARO Drilling's results will be reported under the equity method and will not be consolidated into Rowan's financial statements.
Rowan finished the year with $1.33 billion of cash on the balance sheet and $2.5 billion of debt. Finances are Rowan's strength: The first debt maturity is relatively small and comes in 2019, while the next one is due only in 2022.
The combination of reasonable debt, easy maturity schedule, sufficient amount of cash on the balance sheet, and the breakthrough joint venture with Saudi Aramco makes Rowan a survivor in the current market downturn. However, it's important to remember that the survivor status does not guarantee solid share price performance in the near and, perhaps, even in the medium term. The trading action in Rowan's shares will remain very sensitive to changes in oil prices and changes in general outlook for the offshore drilling industry.
Also, investors should note that drillers entered a period of GAAP losses. If Rowan did not record the sale of assets to ARO Drilling, the company would have reported a loss. GAAP losses for the next few years should be expected, as revenues shrink due to new, poor margin contracts, while depreciation charges remain mostly stable.
The good news here is that actual earnings numbers won't dominate the trading scene. The key points to consider are new contracts, cash flows, general outlook for the industry and the company's own comments regarding the perspectives of its units.
During the recent earnings call, Rowan's management team had a chance to share its vision of the future. The key thing that interested me was the company's view on the future of its four modern drillships - the Rowan Renaissance, Rowan Resolute, Rowan Reliance and Rowan Relentless - which are all based in the U.S. Gulf of Mexico now. Previously, the company was reluctant to commit its drillships to new contracts. Rowan explained that many contracts were for short-term jobs, and it did not make sense to mobilize a rig for a short-term job with no follow up, only to stack it again later.
However, it now seems as if the company is committed to employ one drillship at whatever the dayrate might be this year. Rowan also reiterated that most opportunities that it sees are for the second half of 2018 or for 2019. Speaking about the perspectives of the ultra-deepwater segment, the company stated that it saw little pricing leverage for 2018 and 2019. In my opinion, it's about time for Rowan to sign at least one contract for a drillship and keep the rest of them warm stacked as an option on the recovery.
Rowan also stated that it was close to signing contracts for two jackups in the North Sea. Such developments are to be expected as the North Sea is the hottest segment right now, and the company has a number of jackups that are suited for work in the region. Rowan commented that it was expecting to see harsh-environment and especially ultra-harsh environment jackup utilization increase throughout the second half of 2018. This is fully in line with commentary from other drillers, and this trend is certainly backed up by data, be it new contracts or rig purchases.
Going forward, the two strong Rowan segments will be ARO Drilling and the company's harsh-environment jackups. The whole drillship segment remains an option for the future, and it's difficult to anticipate that it will bring material cash flows over the next two years.
The rebound in Rowan's shares proved short-lived, and the company's shares have broken below the significant support level at $12. The near-term performance of Rowan shares will be fully dependent on prevailing oil prices. In case Brent oil (BNO) develops further downside momentum, more pain for Rowan shares should be expected - regardless of the company's fundamentals. Strategically, Rowan remains the safest bet on the offshore drilling recovery due to good finances, big exposure to the jackup market, breakthrough venture with Saudi Aramco, and four drillships that serve as an option on the ultra-deepwater market recovery. In the short term, volatility will remain elevated, so anyone who thinks about purchasing Rowan shares for the long term should choose the price on pullbacks and be prepared to ride many ups and downs.
If you like my work, don't forget to click on the big orange "Follow" button at the top of the screen.
