With the objective to grow its offshore drilling business, Rowan Companies Inc. (RDC) plans to buy Norway’s Skeie Drilling & Production ASA (or “SKDP”) for a total consideration of nearly $1.2 billion.
Rowan provides contract drilling services utilizing a fleet of 23 high-spec offshore jackup rigs and 32 deep-well land rigs while SKDP is currently building three high-spec N-class jackup rigs with Keppel FELS in Singapore.
The total consideration comprises $530 million SKDP’s outstanding debt, an additional $420 million required for completion of three rigs and the remaining $250 million for the purchase of SKDP’s all outstanding shares. The deal is expected to be closed by July 19.
Following the transaction, Rowan will own 50.3% (with existing 1.5% ownership) of SKDP’s outstanding ordinary shares. The company will then offer to buy the remaining Skeie shares on the same terms.
We believe that Rowan’s drilling services will be expanded and diversified with this transaction. Its operations are presently conducted in Mexico, Saudi Arabia, Egypt, West Africa, Eastern Canada and the U.S. Gulf of Mexico (GoM). On the other side, Rowan will also benefit from acquiring these rigs at a significant discount to the current replacement cost.
Rowan’s premium high specification rig fleet enjoys greater utilization and higher dayrates than most other shallow water fleets. Moreover, the Norwegian market has a history of high utilization and dayrates compared with other jackup markets. We believe the company’s earnings and cash flow visibility will remain positive in the near to medium term with this deal and its solid backlog position.
However, all these positives are already reflected in the company’s current valuation as Rowan shares currently trade at 2011 P/E multiple of 11.4x compared with the industry average of 11.3x. Consequently, our Neutral recommendation remains unchanged with a Zacks #3 rank (Hold).
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