Sell Rowan Amid Price Struggles, Market Capacity

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Rowan Companies (RDC), is a global provider of offshore oil and gas contract drilling services. As of the end of second quarter, Rowan had thirty-two offshore drilling units with two under construction and 30 jack-up rigs. Rowan’s customers use these assets for exploratory and developmental drilling purposes.

rowan-companies-rdc-stockSince 2009, the company has sought to divest itself of non-core assets and focus on investing in ultra-deepwater platforms. In executing this strategy, Rowan divested its manufacturing operations in 2011 and contracted for the construction of four ultra-deepwater drillships. Rowan took delivery of the first of these drillships in Jan. 2014 and another in June 2014, the other two will be delivered in Oct. 2014 and Mar. 2015.
The market for contract drilling services is very competitive and the success of obtaining contracts is dependent on multiple factors including price, rig capability, performance and reputation. There are currently 829 mobile rigs available worldwide and as of the end of 2013, 135 were under construction.

As of Feb. 2014, there were 98 drillships operating worldwide and 74 under construction. Rowan estimates that it is the ninth largest offshore drilling contractor in the world and the fifth largest jack-up rig operator.

RDC – Earnings Summary

Fourth-quarter 2013 earnings came in at $49.7 million, below Q4 2012 levels but revenue was robust at $393.4 million, up 11% on a year-over-year basis driven by higher asset utilization and increased average daily rates.

The first quarter of 2014 reflected increased pressure on sales and earnings with operating income of $34.7 million (excluding a one-time gain) compared to $68.1 million the previous year. Revenue slipped 4% from the prior year to $377.6 million due to lower utilization caused by out-of-service periods of two high-rate, jack-up rigs. In the first quarter, Rowan announced that its first ultra-deep water drillship was now operating in Namibia, Africa and even though it faced stiffer competition with new capacity entering the industry it expected expiring 2014 contracts on its existing rigs to be extended at or above their existing rates.

This expectation did not appear to pan out by the second quarter with Rowan reporting net income of $41.2 million compared to $70.3 million in the previous year, both numbers exclude one-time charges. The deployment of Rowan’s new ultra-deepwater drillship helped revenues, which increased 3% to $422.9 million from the same period last year but was off-set by higher out-of-service time of 13% compared to 8% in the prior-year quarter.

RDC- Stock Analysis

Rowan is extremely cheap compared to its peers with a price-to-earnings of 16.24 and a forward P/E of 6.2. Rowan’s price/earnings-to-growth is .61 based on earning over the next 12 months. Next year’s earnings are expected to grow almost 85%. Analysts have a 12-month consensus price target of $33, and RDC stock currently trades in the $25 level range with a small dividend of 1.3%.

Rowan Stock Chart

Source: www.nasdaq.com

To invest in Rowan one needs to believe that the price of oil will bounce back and that day rates Rowan charges for use of the rigs will not deteriorate due to increased market capacity coming on-line, both of which I think are unlikely. Societe Generale, echoed similar feelings when it downgraded Rowan in September. Even with its low current valuation, Rowan’s stock is a definite sell in my book for now, given the risks to next year’s earnings.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com

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