Rowan (RDC) has just announced a new drillship contract, which is especially interesting since the company is about to merge with Ensco (ESV). Without further ado, let's get to the contract details and Rowan's drillship fleet situation.
Rowan stated that drillship Rowan Renaissance got an 80-day contract in Mexico from Petronas. The contract is expected to begin in the second quarter of 2019 and has a one-well priced option with an estimated duration of 80 days. Currently, the rig is under previously reported contract with Total (TOT). Bassoe Offshore estimates that the dayrate on the new contract is $160,000, up from the estimate of $150,000 for Total's job and in-line with prevailing Gulf of Mexico rates:
Source: Bassoe Offshore
At the end of 2018, Rowan received a contract that could have allowed the company to reactivate Rowan Reliance, but then, oil prices fell, ultra-deepwater outlook changed, and Rowan decided to transfer the contract to Rowan Resolute. The company also had Rowan Relentless on contract with Exxon Mobil (XOM). It is unclear whether the rig still drills for Exxon: data from Bassoe Offshore indicates that it is already in the warm stacked state, while data from InfieldRigs indicates that the rig is still drilling for Exxon Mobil:
Source: Bassoe Offshore
Anyway, Rowan has still much work to do to jump-start its drillship segment. While Rowan Resolute is busy until February 2020, Rowan Relentless needs a new contract after the Exxon contract while Rowan Reliance remains stacked. The company needs an increase in the Gulf of Mexico activity like the one provided by BHP (BHP) which has recently approved $952 million in funding to develop Atlantis Phase 3 and drill an appraisal well in Mexico. However, it remains to be seen whether Gulf of Mexico activity will be sufficient enough to move dayrates in 2019. As a side note, positive developments in Gulf of Mexico may help offshore supply vessel provider Hornbeck Offshore (HOS) in its quest to solve problems with maturities (I last wrote about Hornbeck here).
As of now, the dayrates in the Gulf of Mexico remain low and show no material improvement. As seen in the first picture of this article with dayrates, rates in Brazil are better, but drilling in Brazil is more costly for the driller, so you have to know the exact internal cost structure (which is, of course, not disclosed) of a certain drilling company to evaluate whether drilling for a better dayrate in Brazil yields materially better results than drilling for a lower rate in, say, U.S. Gulf of Mexico.
Anyway, a new contract is certainly positive for Rowan and, given the current upside in Brent oil (BNO) prices, market's love affair with Rowan shares that started at the beginning of this year may continue:
I'd reiterate my view that pre-December panic levels may be within reach, but the higher Rowan shares go, the more resistance they might see due to selling by those investors who do not like the deal with Ensco. Rowan and Ensco will soon be one company, and the management of this company will have to solve the puzzle of getting jobs for the many floaters that this new company will have.
As of now, the standalone Rowan looks very solid, with healthy balance sheet, joint venture with Saudi Aramco (ARMCO), great coverage on the jackup side, and ultra-deepwater potential of its four modern drillships. Whether the combined company will look as robust as standalone Rowan is a big question, but one thing is certain - it will need higher oil prices to succeed, as there is no way for a company with bigger floater presence and weaker balance sheet (as compared to standalone Rowan) to perform better in the world of ~$60 oil. The earnings season for drillers is already underway, so stay tuned!
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HOS over 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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