Rowan Companies Inc. (RDC) recorded adjusted fourth-quarter 2010 earnings of 42 cents per share, breezing past the Zacks Consensus Estimate of 29 cents but down from the year-earlier profit of 52 cents. The trend was similar for full year 2010, with adjusted profit of $2.59 per share beating the Zacks Consensus Estimate of $2.44 but showing deterioration from $2.99 posted in the prior year.
Total revenue improved 14.8% year over year to $458.8 million in the reported quarter, beating handily the Zacks Consensus Estimate of $416 million. Full year 2010 revenue also upped 2.8% to $1,819.2 million, but failed to match up our expectation of $1,974 million.
Operational Performance
The company’s drilling operations generated revenues of $259.6 million in the quarter, up 1.7% year over year. Though modest, the improvement was on the back of offshore fleet additions and higher land rig utilization, partially offset by lower average day rates. However, the gross drilling margin decreased to 47% from 52% in the year-earlier quarter. Operating income decreased 27% to $55.3 million from the year-earlier level of $76.0 million.
Rowan’s manufacturing operations’ external revenues jumped 37.9% on a year-over-year basis to $199.2 million. Gross manufacturing margin remained flat on an annualized basis at 17%. However, operating income more than doubled to $18.9 million from the year-ago level of $9.1 million.
The company’s contract drilling as well as manufacturing improvements were attributable to proficient cost controlling. This was accompanied by outperformance by the mining products group, for which Rowan expects demand to perk up in 2011.
The company’s North Sea rigs experienced an average dayrate of $175,700 (versus $195,900 in the year-ago quarter) while the overall dayrate of all offshore rigs was $142,500 (versus $167,700 in the fourth-quarter 2009). Average utilization of the company’s offshore and land rigs were a respective 65% and 84% versus 63% and 59% in the year-earlier quarter.
At the end of the quarter, cash balance was $437.5 million and long-term debt (including current maturities) stood at $1,185.9 million. Debt-to-capitalization ratio was 24.0% versus 31.4% in the prior quarter.
Outlook
We remain optimistic on the company’s premium high specification rig fleet that enjoys greater utilization than most other shallow water fleets. Hence, we believe that significant earnings leverage could be achieved with increasing tendering activity.
Rowan delivered six high-spec jackups during 2010 with three more scheduled for delivery in 2011. Rowan’s enhanced focus on high-spec resources as well as impending tendering activities for multi-year drilling programs in the North Sea, Saudi Arabia and South-East Asia are likely to support the requirement for high-spec units.
While the majority of Rowan’s fleet is considered to be high-end premium jackups, the company is also a proven offshore driller, with a long-term strategy in place. For 2011, the company plans to either divest or spin off its LeTourneau manufacturing business and land rig operations to focus entirely on offshore markets that will, in turn, unlock value for shareholders. Rowan’s manufacturing capability should provide it a competitive advantage in jackup technology.
Currently, we maintain our Neutral recommendation for Rowan as we believe all the above positives are already priced in.
Rowan, which competes with peers such as Diamond Offshore Drilling Inc. (DO) and Ensco Plc (ESV), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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