We maintain a Neutral rating on Rowan Companies Inc. (RDC). The Texas-based company is a provider of international and domestic contract drilling and aviation services. The company’s fleet of 29 jackup rigs is located worldwide, including the Middle East, the North Sea, Trinidad and the Gulf of Mexico (GoM).
Rowan’s premium high-specification rig fleet enjoys greater utilization than most other shallow-water fleets. We believe that the company exhibits an improved rig execution level and stands to benefit from the upward trend in the high-spec jackup market and mining equipment orders.
Rowan’s first two N-class jackup rigs started operations in the North Sea in June, and the company also made an entry into Southeast Asia after nearly two decades. The company also anticipates improvement in utilization and day rates in 2012 for offshore rigs.
The majority of Rowan’s fleet is considered to be high-end premium jackups with a long-term strategy in place. As part of its expansion, the company has ordered an ultra-deepwater drillship.
Overall, the company remains in excellent financial health with a debt-to-capitalization ratio of 20.7% and $892.6 million cash in hand, as of September 30, 2011.
However, Rowan’s third quarter earnings showed a substantial decline mainly due to the delay in rig moves and upgrades in new contract processing. The higher repair and maintenance expense related to most upgrade projects further hurt the performance.
As a company operating in the energy sector, Rowan remains susceptible to unstable movements in crude oil and natural gas prices and is subject to global economic weakness.
Moreover, the offshore drilling segment is seasonal, cyclical and susceptible to external shocks that may lead to volatility. Again, there is the possibility for construction delays and cost overruns on new buildings. Operator contracts could be cancelled or renegotiated if delays extend beyond a rational time period.
As such, we expect Rowan’s growth potential to be restrained with little room for meaningful upside from current levels. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating). The company faces competitive threats from Transocean Ltd (RIG) and Ensco Plc (ESV).
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