Rowan Finds New Work For Rowan Viking

Summary

• Rowan announces new contract for jack-up Rowan Viking.
• Not surprisingly, the new contract is in the North Sea, the only vibrant segment of the offshore drilling market.
• The stock will remain volatile for the time being, although the longer-term prospects of the company appear sound.

Rowan (NYSE:RDC) just announced that it has found work for its jack-up Rowan Viking. This ultra-harsh environment jack-up was awarded a five-well program by Shell (RDS.A) (RDS.B) for plugging and abandonment work in the Goldeneye platform in the Central North Sea.

Rowan stated that the work will begin in June 2018 and will continue for approximately 100 days. The dayrate is undisclosed. Currently, the rig is on contract with Lundin in Norway at a dayrate of $219,000 and is scheduled to finish work by June 2018.

Rowan Viking

Currently, Rowan has five jack-ups in the North Sea: Rowan Norway, Rowan Stavanger, Rowan Viking (all three belong to N-Class) and two Super Gorilla jack-ups Rowan Gorilla V and Rowan Gorilla VII.

As I outlined in my recent “supply fundamentals” series, the North Sea is the only true bright spot in the offshore drilling market both on the jack-up and the floater side. With most of Paragon’s rigs soon to be retired by Borr Drilling, the list of available jack-ups is not that big:

Source: author’s work, InfieldRigs

Keep in mind that Rowan Stavanger will be working for Repsol Norge for approximately 150 days with estimated commencement between September – November 2018 followed by priced options.

In my opinion, the marketplace in the North Sea is slowly getting tighter, and Rowan stands to benefit from this trend as it has modern, high-spec rigs available in the region. Currently, main competitors are Borr Drilling and Maersk.

The new contract is a good development at times when all drillers’ shares are under pressure. Rowan shares have lost a lot of ground since the beginning of the year and are down more than 25% year to date. Part of the reason for this poor performance is that Rowan shares started the year at a relatively high level, near $17.

Back at the beginning of this year, I highlighted the fact that while rig utilization was way below September 2015 numbers, shares were back to September 2015 levels. The first three months of this year showed that contract activity was not rising as fast as one could have expected given the positive dynamics of oil prices. Thus, it’s not surprising that Rowan shares have lost a lot of ground since higher share price levels demanded more tangible proof of improvements in the contracting front.

That said, I remain optimistic on Rowan for the long term. The company has access to the best jack-up market in the world through a joint venture with Saudi Aramco (ARMCO), modern jack-ups in key markets and four modern drillships just in case the floater recovery is strong. In the short term, I continue to expect a lot of volatility for all offshore drilling stocks including Rowan. In the coming months, the market’s general view of offshore drilling stocks will likely dominate over company specific fundamentals.

So far, Brent oil’s (BNO) failure to breach $70 in combination with weak recovery everywhere outside the North Sea has kept all offshore drilling stocks under intense pressure. With the upcoming earnings season, offshore drillers will have a chance to update on how recovery is going, potentially providing catalysts for their stocks. For Rowan, the near-term opportunities include finding work for the remaining North Sea rigs and finding a contract for at least one drillship. Comments on these topics will be the most important catalyst in the upcoming earnings call. Up until then, I’d expect Rowan shares to follow oil prices and peer stocks.

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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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