We maintain our Neutral recommendation on Rowan Companies Inc. (RDC) given its impressive fourth-quarter 2010 results, which comfortably beat both earnings and revenue estimates. We remain on the sidelines owing to the possible oversupply of global jackups in the next few years, thereby reflecting downside pressure on jackup rates.
Rowan’s better-than-expected fourth quarter results mainly driven by improvements in its drilling and manufacturing operations. The company’s contract drilling as well as manufacturing improvements were attributable to proficient cost controlling, accompanied by outperformance in the mining products group, for which Rowan expects demand to perk up in 2011.
We view Rowan as the key premium jackup company in the bifurcated shallow water market. The company’s premium high-specification rig fleet enjoys greater utilization than most of the other shallow-water fleets. We believe that Rowan exhibits an improved rig execution level and stands to benefit from the upward trend in the high-spec jackup market and mining equipment orders.
Additionally, the company’s earnings and cash flow visibility remain positive in the near-to-medium term on the back of solid backlog position and long-term international jackup contracts. North Sea, South-East Asia and Saudi Arabia markets will likely absorb the company’s available high-specification rigs through impending multi-year drilling programs and thereby boost its earnings growth profile.
Again, the monetization of its land rig business or a possible separation of its LeTourneau manufacturing business is under way. We believe this will not only enable the company to dispose its non-core assets, but will also transform it into a pure-play offshore driller.
However, we believe Rowan will face downside pressure on jackup rateswith the distinct possibility for an oversupply of global jackups in the next few years. Moreover, unlike other drillers, the company does not have a deepwater fleet to compensate for the revenue.
Rowan’s growth momentum might also be adversely affected by the geo-political disruptions in the Middle East, fluctuations in the demand level from consumers and new rules and regulations imposed by the government periodically.
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.
DIAMOND OFFSHOR (DO): Free Stock Analysis Report
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