Rowan: Rig Extensions Show That Offshore Story Is Not Over Yet

Dec. 06, 2018 1:48 PM ETRowan Companies plc (RDC)XOM5 Comments

Summary

Exxon Mobil recently exercised options for a Rowan drillship, adding two months to the backlog.
The additional backlog is probably only about $9 million, but any revenue is good given the industry struggles.
Rowan is probably the best positioned company in the industry right now, but it is still being targeted for a takeover by Ensco.
I like this deal even less than I did earlier this year as Rowan's stock has held up a lot better than Ensco's.
There is unlikely to be a recovery in dayrates anytime soon, but the fact that contracts are still being exercised is good news.
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On Monday, December 3, 2018, offshore drilling contractor Rowan Companies (NYSE:RDC) announced that Exxon Mobil (XOM) has exercised the first two options on the Rowan Relentless drillship. As each of the options has an expected duration of thirty days, this adds about two months to the rig's backlog, which means that it will generate more revenue for Rowan. This is a positive sign both because of that and because it tells us quite clearly that Exxon Mobil has not given up on the offshore environment despite the recent decline in oil prices.

About The Rig

The Rowan Relentless is one of the most advanced drilling rigs in operation today.

Source: ShipSpotting.com

This was the fourth and final rig in Rowan's ultra-deepwater rig construction program that was begun during the peak of the previous upcycle. As the rig left the shipyard in 2015, it is one of the newest rigs around (offshore drillers essentially shut down their new rig construction programs in 2014 in response to industry weakness, so few rigs were started after that date). The rig itself is an R-class rig using the Gusto MSC P10,000 design. Despite the name though, this rig is actually capable of operating in up to 12,000 feet of water. It is also capable of drilling wells up to 40,000 feet deep. As you might expect, this is essentially the cream of the crop as far as ultra-deepwater drilling rigs go.

About The Contract

The Rowan Relentless has been employed by oil supermajor Exxon Mobil since the middle of September 2018. Originally, this was a one-well contract that was expected to last for eighty days, which puts its expected expiration date in December. The addition of these two additional wells likely extends the contract into February.

One trend that we have been seeing frequently over the past year or so is companies not disclosing the actual dayrates that are being awarded on rig contracts. This is ordinarily done for competitive purposes, but it does make it difficult to track the dayrate trends in the industry. As I stated in a recent article, however, the leading new contract dayrate has been hovering around the $140k-$160k range for quite some time now, so it seems reasonable that the dayrate under this contract and its corresponding options are in that range. If this is correct, then the exercise of these two options only added about $9 million to Rowan's backlog. This is not particularly attractive, but, admittedly, at this point, any additional revenue is a good thing.

The Drilling Environment

As I have been discussing in numerous previous articles, the offshore drilling industry has been slowly recovering. We have seen this in some of the improvements in utilization, although dayrates still remain quite suppressed. Thus, the companies in the industry have not really seen their cash flows recover.

As might be expected, one of the factors driving the improvements that we have seen in the industry is the improved oil price environment. However, oil prices have declined since early October.

Source: Oilprice.com

Thus, there may be some fear that the industry will lose some of its current contracting strength as a result of this. While such an effect would likely have a negligible impact on dayrates, it would likely make it difficult for rigs to secure any more work. This would naturally result in companies being forced to take even more losses than they already have due to further scrapping of rigs as well as crash cash flows even further.

Fortunately, so far, that scenario does not appear to be playing out. Last week, we saw Seadrill Partners (SDLP) win a contract for the West Capella, and now, Exxon Mobil has chosen to extend its drilling program. This points to continued strength in contracting, although dayrates will likely not improve for quite some time.

Merger With Ensco

Back in October, Rowan and Ensco (ESV) announced plans to merge. The market originally supported this plan but I was skeptical of the benefits of this arrangement as I cannot see any benefit to Rowan. This remains my attitude given that Rowan is arguably the best positioned company in the offshore drilling industry, and this move by Exxon Mobil improves the company's position, if only slightly.

As proposed, the current shareholders of Rowan will receive 2.215 shares of Ensco for each share of Rowan that they own. The curious thing about this deal is that at the time, there was no acquisition premium assigned to Rowan. The reason for the acquisition premium is to induce shareholders to sell so the absence of this, particularly given Rowan's superior position, is curious.

One of the quirks of all stock transactions is that the purchase price varies significantly due to the natural fluctuations of stock prices. We see this here as the stock prices of both Ensco and Rowan have declined since the announcement, which is likely a function of the decline in oil prices. At the current stock prices of both companies, the deal values Rowan at $12.87 per share. Unfortunately, Rowan is currently trading at $13.50 per share. This actually makes the deal look less appealing than it already did.

Conclusion

In conclusion, the latest move by Exxon Mobil tells us that the story is not yet over for offshore drilling as oil companies continue to be interested in the environment despite the decline in oil prices. Unfortunately, dayrates show no signs of recovery, so cash flows of drilling contractors are unlikely to recover anytime soon. We have been seeing consolidation in the industry as companies seek to adjust to this new dynamic. Rowan itself is a target of a takeover deal from Ensco, but the company's improving strength is making this deal look less appealing than it did previously.

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