Contract drilling services provider Rowan Companies Inc. (RDC) reported better-than-expected first quarter 2010 results. Quarterly earnings (excluding an inventory charge) were 81 cents per share versus the Zacks Consensus Estimate of 74 cents and year-earlier earnings of $1.14. Revenue for the quarter was $432.4 million, down approximately 13% year over year.
Though the earnings came in above expectations on the back of strong jackup activity and lower operating costs, the year-over-year negative comparison was due to several factors, including significantly lower rig utilization rate.
Operational Performance
The company’s drilling operations generated revenues of $331.0 million, down 13% year-over-year, due primarily to lower rig utilization. The gross drilling margin was 59%, compared to 62% in the year-earlier quarter and 52% in the previous quarter. Net income for the quarter was $137.0 million, down 27% from the first quarter of 2009.
Rowan’s manufacturing operations generated external revenues of $101.4 million, down 11% year over year. Gross manufacturing margin was 17%, compared to 21% in the year-earlier quarter and 17% in the previous quarter. Net income for the quarter (excluding the above mentioned charge) was $3.1 million, down 72% year over year.
The company’s North Sea rigs experienced an average dayrate of $287,700 (vs. $279,800 in the year-ago quarter) while the overall dayrate of all offshore rigs was $183,200 (vs. $173,600). Average utilization of the company’s offshore rigs and land rigs were 75% and 71% versus 93% and 74%, respectively, in the year-earlier quarter.
At the end of the quarter, cash balance was $522.1 million and long-term debt (including current maturities) stood at $833.8 million, while debt-to-capitalization ratio was 20.8%.
Outlook
While the industry has been currently witnessing increased activity and tendering in the global jackup market, the Middle East, North Sea and Gulf of Mexico regions have been the most significant for Rowan’s fleet. In addition, management stated that the company is seeing strong interest for high-spec jackup fleet by operators in several markets. As of now, all of Rowan’s high-spec rigs are contracted.
Although deepwater fundamentals are the most compelling in the long term, we believe that land drillers and jackup leveraged companies such as Rowan will likely outperform in the near term as their recovery continues. We are currently Neutral on the Rowan shares.
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