Entering text into the input field will update the search result below

Rowan: Discussion Of Q4 Results And Key Comments

Vladimir Zernov profile picture
Vladimir Zernov


  • Rowan reports Q4 results.
  • The company provides insight on its strategy regarding the four Gulf of Mexico drillships.
  • Rowan is a certain survivor. But the stock's path will be highly volatile in the foreseeable future.

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

If you like my work, don't forget to click on the big orange "Follow" button at the top of the screen.

This article was written by

Vladimir Zernov profile picture
I'm a trader who trades both short-term and long-term. I started my career as a day-trader for a trading firm, but then turned to longer time frames and went on my own to manage my portfolio. I use technical analysis as well as fundamental analysis in my research.

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.

I may trade any of the above-mentioned stocks.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (40)

Aro's 5 rigs together have a 0.603m$ dayrate
Their revenue in 2018 wil be 220m$ (0.603*365)
The net profit in 2018 will be max 70m$
ARO have the intension to buy 20 new rigs at 220m$ each over the next 10 years
= average 2 new rigs each year = each year 440m$

It's clear that in the beginning Rowan and Saudi have to put big new money in this company

Actual dayrates
Gilbert Rowe 0.069$
JP Brussel 0.13m$
Bob Keller 0.13m$
Sar 201 0.079m$
Sar 202 0.195 m$
Mr. Bert profile picture
Another way to look at it is, assume 20 rigs x $220mm per rig = $4.4 billion of rig investment.

If you were to investment $4.4 billion in rigs, what sort of net profit would you require?

10% sounds way too low. There are easier and better ways to make 10%.

If you are willing to do this for 15%, then you would expect net profit of 15% x $4.4 billion = $660 million.

Add to that the NPV of the contracts to manage the rigs and you are probably pushing $850mm in NPV for ARO.

So, using this back of the envelope calculation, I assume that RDC's 50% stake in ARO could/should be worth on the order of $400mm on a NPV basis.

Would love to hear feedback on this as I am just guessing.
Thewaltzy profile picture
I suppose...it’s hard to know. Your numbers are prob right.and I suspect they are close to what is in the aro plans. But project plans are often way off the mark. I do think that aro will be worth money. But I couldn’t model that value. I model stuff for a living (in excel, prophet or Moses) and models are often too wrong.
I think the value in aro is: if offshore markets go up, then rowan is fine. It has 4 UDWs, etc. if they go down, they have aro. A huge backstop. They are cash rich now so can’t really go bust w/o crazy decisions. I think mats will trend up for OSDs. So Rowan should be fine.
The details...I just don’t think we know enough at this juncture.

The pbr rigs were a great purchase. I think aro will give them 3 year deals. And I think RDC will employ more rigs that way.

And I think aro will prob we worth several hundred million to RDC as well.
Mr. Bert profile picture
I hear you about the accuracy of the models. There are lots of things that could make the number a lot higher or lower, but having a ballpark figure is helpful.
Mr. Bert profile picture
I am pretty much TOTALLY GUESSING here, but maybe this will inspire someone who knows more than I do.

Basically, I ignore all issues as to dayrate, opex, etc. and focus on only one metric--IRR and/or return on invested capital.

I assume a cost of $220mm per rig. This is what David Carter Shinn at Bassoe estimates, so I feel good about it. He probably knows what he is talking about.

I assume that the rigbuilding period is two years. That is, in years 1 and 2, there is a $110 million outflow each year.

I then ask the question, what series of 16 annual payments will be required for a 15% IRR. Using the Excel IRR function, it is quite simple to figure out that this number is $39.725 milliion.

That is, if you spend $110mm each in years 1 and 2, and then you receive $39.725mm in years 3 through 18, you have earned an IRR of 15%.

Take this and assume 1 rig delivery in 2021, and 2 rigs every year thereafter, and then 1 rig in 2031.

Using a 7.5% discount rate, I calculate a pretax NPV of $1.66 billion for ARO. At a 40% tax rate, this is a $1 billion NPV. Divide by 2 for RDC's share, which yields $500mm of NPV.

If you use a 10% discount rate, you get a $850mm NPV.
Great write-up AND intelligent comments!
Mr. Bert profile picture
Yes, the rigs sold to ARO got a LOT more than Bassoe estimated. I am assuming that this is because of the contracts associated with those rigs. Let me know if you think otherwise. If not, then I don't have an answer.
Thewaltzy profile picture
Actually...I have no idea. The contracts were-I think-extended at ththe current/precious day rates.. And the rigs contributed by SA are old.i think rowan is cheaply valued because the unknown that is aro will be huge. Saudi currently has about 44 jack ups, I think. Aro will have 20 rigs-with g’teed employment. That’s huge. W/o it, I wouldn’t be as happy with rowan. But with that-rowan are the clear no1 in this space. Not borr with a fleet of stacked ships from pgn et al. Not ensco or shelf or any of the other companies with decent JU fleets. Plus rowan has an option on Deepwater. And it has $1bn+ of flexibility. They could afford to merge or buy some competitors. It’s a good spot to rest in.
Mr. Bert respect for your work on TUSK.

Now back to RDC: as far as I know the rigs were sold without contracts.

The following rigs were sold:

Gilbert Rowe was on contract with Saudi Aramco for 69k until August 2017.
J.P Bussel for 130k until August 2017.
Bob Palmer for 198k until August 2017.
Thewaltzy profile picture
A quick note on noble
Current assets less total liabilities:-3.7bn
Fleet value: 3bn
Backlog of ~ 3bn
Arbitrarily I’ll value that as worth 1bn
Mkt cap of 1bn. Is it overvalued? Maybe.

Total current assets of 1.6bn
Total debt of 5.5bn
Per bassoe, fleet valuation of approx 5bn
3bn of backlog. I’ll value at 1bn.
Mkt cap is nearly 2bn.
So it’s valued around-maybe slightly less than book.

I’m not Uber bullish on offshore drillers. I own ensco & rowan. I think the one difference between rowan and the others is the Saudi JV. Which I think will be very valuable over time.My 2c!
Mr. Bert profile picture
Of course, a critical component of value is the NPV of the backlog. If you have high-rate contracts, that could be worth a lot. Cash breakeven contracts are obviously worth little--they just keep the rig warm. I am not sure at this point what the mix of high and low rate contracts is and how to value the backlog. Any insights would be appreciated.

Obviously, adjusting for backlog would make RDC relatively less attractive than what the above analysis shows, but I am not sure by how much.
Thewaltzy profile picture
Rowan current assets of 1.56bn
Total liabilities of 2.8bn
At 11.6/share, market cap is 1.466bn
Implying EV of ~ 2.7bn

RDC have 27 units they own
Plus half of the 5 in aro

Bassoe has included the 7 rigs aro will manage for Rowan in the valuation. These are
Bob Palmer
Arch Rowan
Charles Rowan
Per bassoe, these are worth 321mn
Bassoe has the entire of aro valued at 560. So there is 240mn left. Rowan gets 50% or that.
Per bassoe, rowan (20 units only) is worth 2311. To which we need to add the rigs included incorrectly of 321 = 2632. Plus 50% of the 240 that is aro. So rowan now (after a hammering of late) trades slightly above adjusted “market” value.
No allowance there for any above mkt contracts...they don’t really have any. Plus no allowance for the fact that aro will be massive.
Is Rowan cheap? Yes. Could it get cheaper?? Yes...but not by much. Is it undervalued? I’ll buy it! :-)

- I’ve used only the lower of bassoe’s numbers
- the rigs sold to aro got more than bassoe estimated
- some of th rigs in aro/rowan are valued by bassoe at scrap. Which is too low.
Mr. Bert profile picture
In other words, for RDC, you are essentially paying the very depressed market value of its rigs, and you are getting everything else--the corporate structure, the management, the optionality, the backlog, and most importantly, ARO--for basically nothing.
Thewaltzy profile picture
Interesting. I would think bassoe would reply to an email, btw. Which could be enlightening! I will take a better look at your email and come back to you in due course...I’m pretty sure RDC IS the best value. Will be in touch :)
Mr. Bert profile picture
I know there are various ways to value these companies, and so this is just one. But it is the one that I am focusing on for the moment.

Basically, I take the enterprise value of the companies. Then, I subtract the mid-point of the Bassoe rig valuation. The difference is the amount of what I would call intangible value (backlog, management, optionality, etc.) being assigned to the company versus the "hard" valuation of its rig fleet. (Of course, the value of the rig fleet will fluctuate, and Bassoe does a very good job updating their rig valuations.)

According to my calculation, intangible values are as follows:

RDC = ($151 million)
ESV = $443 million
NE = $1.3 billion
RIG = $925 million
DO = $1.8 billion

A proper analysis should also add back expected future free cash flow from backlog, but that figure is difficult to calculate without knowing the rate and expense structure of each contract.

In the case of RDC, there is a $374mm discrepancy between my figures and Bassoe figures because I think Bassoe is including in its ARO valuation rigs that are owned by RDC.

RDC value does not include the NPV of ARO.

As can be seen, RDC is by far the cheapest on this metric. It is actually selling for a discount to the value of its rigs per Bassoe.

If you adjust RDC for ARO, you need to add $270mm for the note receivable. I believe that you should also add the NPV of ARO drilling.

This would make RDC easily the cheapest driller. Typically, the cheapest of the bunch is cheapest because it has some sort of fundamental problem--like too much debt, or a really bad mix of product. In this case, it is the oppose. RDC has the best balance sheet and probably the best mix of equipment in terms of what will recover soonest. The only place it really falls short is in backlog.

I also like the fact that RDC only spent $100mm on capex in 2016 and 2017,. and that is its budget for 2018. Pretty modest compared to the depreciation charges.
Mr. Bert profile picture
Vlad, nice write-up. Have you ever tried to calculate the NPV of ARO Drilling?
Thewaltzy profile picture
Hi me bert
At this stage, you couldn’t really do that (I don’t think)
What I would say is that the current backlog from 5 committee jack ups is over 600mn USD. With 2 more to come shortly.
Mr. Bert profile picture
Waltzy, I disagree. I think it is an ideal candidate for an NPV calculation. You have 20 rigs coming into service over the next 10 years. Each rig will cost $x to build and will be guaranteed y% return on capital for 8 years and then after that will price according to some market mechanism for 8 years and after that may continue to work or have some residual value. Lots of variables and I am guessing at pretty much every single variable, but I can get in the range of NPV of $300-400 million. This is only for the 20 newbuild rigs. I want to see what other people have calculated.

It sounds like the agreement is such that the capital cost of the rig is fully amortized after eight years. That should be pretty easy to calculate. The next eight years are a market based rate based on a certain index. Of course, that could be anything, but it seems the minimum base rate will guarantee them a profit.

And if they can work for longer than 16 years, the rest of that is all gravy as well.
Thewaltzy profile picture
Sorry-yeah-all that is true. But we don’t know - basically - th formula that the JV will use for calculating the rates the rigs can charge SA.
Now...I think they’ll make a good rate of return. Reason? Although there would have been competition for the JV, I don’t think anyone was that close to rowan. And i don’t think SA will actually mind, so long as the rates are pretty competitive.
But I don’t know what value we could ascribe to the new builds.
As to the existing (5+2) rigs? They are all cash flow positive, with gt eed long term contracts.
Rowan is a buy! :)
Interesting analysis as usual, Vlad.
Regarding the current situation in the North Sea, it´s interesting to see how this region, in spite of being usually considered as "very high cost" in the oil production curve, has showed a rejuvenation in the early phases of oil price recovery, in a sub 70s oil price environment. Ultradeep water segment has been left behind so far in the global offshore oil market.
I understand that the reason for the early recovery of the North Sea could be that, because of infrastructure already in place, there are lots of prospects that can be easily tie into existing platforms, pipelines, etc, generating good economic returns at today´s prices.

Just my oppinion

Vladimir Zernov profile picture
I think it's a combination of infrastructure, reliability of processes and favorable geology. They drill, find and produce non-stop.
Vlad, Nice write up...
canyonwlf7 profile picture
WTI headed back to 67 by a Summer, no worries
nice writeup appreciate I appreciate it. hope it drops below $10 again.
But, I found the rig price response is in a matter way compare to rdc if you consider rdc is the safest bet
Vladimir Zernov profile picture
Short-term price action tells nothing about fundamentals.
Tudor Invest Holdings profile picture
Hi Vlad,

Great article. Rowan is, in my opinion, the safest bet in this sector. Probably a good stock to buy now, put in a drawer and only open it 5 year later. It might be a nice surprise.

At this moment in the cycle my own bet is on some of the oil majors, as I have stated earlier on SA. They will (again in my own personal opinion) benefit first

Vladimir Zernov profile picture
Lasse, I agree. Oil majors are safer and likely first in line, but OSD offers more volatility and upside potential. Just different groups for different purposes.
Incredibly odd to have oil exploration so completely decimated just when all the shackles have been removed from US economy and just as global economy finally gets in sync.

We could be facing a severe future problem, where energy demand is high yet fracking can’t deliver enough and offshore drillers are out of business. We can all thank the new Saudi Prince for all this tumult, having completely flooded the market with oil beginning in 2015
Thewaltzy profile picture
Hi vlad
Nice write up. Pretty much agree with all of it! I think it’s a bit unfortunate RDC sold off as much as ESV, ne in recent days. I thought their q4 was actually quite good.
I mean- they sold assets (to the JV yes) for a good price. With more asset sales to come there. They also will have a far better balance sheet come the end of 2018 than today with these sales.
They have aro started.
They bought 2 from pbr...probably the best prices paid for jack ups yet. En route to Middle East.
They got a contract for exl3.
They have 4 more contracts probably inked.

I wonder why they aren’t actively trying to reduce their long term debt costs. ESP if they sell assets to the JV.

I understand the sell off...in concert with oil, general mkt weakness. But I would (and have been) buying.
Hope this actually gets some discussion going! RDC is always I pop vs ensco or even noble.
Vladimir Zernov profile picture
I think of the recent sell-off as a basket-type thing: just a big "sell OSD" button.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

More on RDC

Related Stocks

SymbolLast Price% Chg
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.