Rowan RDC
April 28, 2014 - 5:27pm EST by
pat110
2014 2015
Price: 30.88 EPS $2.04 $2.60
Shares Out. (in M): 125 P/E 15.1x 11.9x
Market Cap (in $M): 3,850 P/FCF 0.0x 0.0x
Net Debt (in $M): 916 EBIT 316 500
TEV ($): 4,766 TEV/EBIT 15.0x 9.5x

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  • Discount to book
  • Oil and Gas
  • Driller
  • Offshore
  • Commodity exposure

Description

Rowan is a company that is posed to increase earnings and cash flow over the next few years, yet trades at .8 times book value.  Book value is $39.39 versus current quote of $30.89.   I have followed Rowan over the past 25 plus years and the cheapest it has traded for substantial periods was around .6 times and that was during 1987 and 2008 – 2009.  Every time in the past buying Rowan at .8 times book provided an opportunity to make money.   A more normalized multiple over the past 25 years is in range of 1.0 to 1.2 book, and at times, Rowan has traded for more than 2.0 times book.     

Based on my earnings expectations for the next three years of $2.50, $4.40 and $4.60, book value should finish 2016 at about $51.00.  At that price, .6 times book would be about the trading price today ($31.29), with the current multiple of .8 times book yielding a stock price of $41.00 for a gain of 30% and at a normalized multiple of 1.2 times book, $61.00 for a gain of 95%.  Additionally Rowan pays a dividend of .40 cents a year. 

Biffins has recently written some very good comments on state of the drilling market and certain rate softening on the Noble and Seadrill VIC boards.  Many of the analysts have written about this as well, and have reduced their ratings on drillers.   Stock prices for most companies are down 20% to 30% off their 52 week highs.  Rowan is 25% off its high.   So I think at least some of the bad news is in these stocks.  Some in a weaker position like Noble (which Biffins discusses) with older fleets may have further to fall.   If Rowan falls in sympathy I believe the buying opportunity would only get better. 

A difference with Rowan is that it fits near the top of the food chain in terms of its rigs and operations, and I think there will be some separation between the haves and have not’s in a softer market overall.   Out of a total market of 517 Jack-up rigs only 177 are less than 25 years old, with 26 rigs older than 40 years.  In the next 10 years the number of rigs over 40 years old will balloon to 293.   Many of these older rigs likely will be scrapped, and also are not competitive with Rowan’s rigs. 

Rowan operates a fleet of 30 jack-up rigs, 19 of which are high spec (the largest fleet in the industry), 8 of which are premium and 3 commodity type rigs (two of which are currently cold stacked).   Rowan primarily serviced the US Gulf but in the last several years has diversified its fleet geographically to take advantage of better opportunities. 

Currently the Middle East is the biggest market for Rowan with 10 rigs followed by the US Gulf (7), North Sea (6) SE Asia (4), Trinidad (2) and Mediterranean (1).  Eleven of the high spec rigs were built in the period between 2006 and 2011, at a cost of approximately $3 billion.  Rowan’s fleet of jack-ups is one of the most modern in the industry, compared to Noble and Diamond Offshore with average rig ages at 31 and 32 years respectively.  This results in Rowan operating at higher average day rates than the industry as a whole.  According to Rowan the average jack up rates by geography are as follows

 

Day rates                                 Rowan             Industry

 

N. Sea                                     $280K             $181K

S.E. Asia                                 $150K             $142K

U.S. Gulf                                 $154K             $142K

Mid-East                                 $124K             $117K

 

Rig age and specs is likely to continue to drive a bifurcation in the rig market as wells are becoming more focused on deep shelf gas, longer horizontals, larger pipes and higher pressures and temperatures.  In addition tighter safety regs play into this theme as well. Additionally, only 39 of the 137 rigs currently under construction are high spec.   Potential rig oversupply is much more contained to the basic rig market, not the premium market Rowan operates in. 

17 of Rowan’s 30 jack-up rigs are scheduled to roll-off contracts in 2014.  10 of the 17 are high spec.  Overall Rowan expects the new contracts for the rigs to  reset at higher rates.    All seven rigs contracted in the Middle East to Saudi Aramco are rolling over in 2014.   Additionally, Aramco is expected to increase its fleet in 2014. 

In late March, Rowan provided its first update of the year regarding jack-up renewals. 

 

  • Rowan Mississippi:  Saudi Aramco exercised its option to extend the primary term for one year in the Middle East at $195,000 per day commencing December 2014, above the previous base day rate of $170,000 after excluding the impact of mobilization and capex fees.
  • Hank Boswell:  Saudi Aramco exercised its option to extend the primary term for one year in the Middle East at $180,000 per day commencing August 2014, above the previous effective day rate of $128,000.
  • Scooter Yeargain:  Saudi Aramco exercised its option to extend the primary term for one year in the Middle East at $180,000 per day commencing November 2014, above the previous effective day rate of $128,000.
  • Rowan Gorilla II:  Awarded a 120-day contract with Pertamina in Indonesia at a day rate of $150,000 per day, no change from the previous base day rate.  
  • Ralph Coffman:  Assigned an estimated 80-120 day contract with Galp in Morocco commencing the beginning of May, 2014 at an effective day rate of $243,000, above the previous effective day rate of $227,000.

This news seems to follow what Rowan said previously, that contracts will be rolling over at higher rates. 

Additionally as further support, below are some comments from Rowan on its year end 2013 conference call in late February by Mark Keller, VP of Business Development:

“2014 is a year of opportunity for Rowan. We have the opportunity to establish our presence in the deepwater arena, as our first drillship is expected to enter the market in April. We have the opportunity to increase day rates and contract duration, as 17 of our jack-ups will roll off their current contracts in the remainder of 2014. We have the opportunity to prove our mission statement, that customers rely on Rowan for their most demanding drilling projects worldwide. We look forward to the challenges that 2014 may bring.

Today, I'll review the jack-up market, including regional comments of the areas where we are currently operating, and I'll conclude with an update on the ultra-deepwater market and the outlook for the fourth drillship, the Rowan Relentless.

Worldwide jack-up utilization is 88% despite the continued increase in utilization since January 2011. The industry seems a little bit anxious about the recent plateau. With the current supply of 515 jack-ups and 137 more under construction, the big question remains will the market be oversupplied in the coming years. After careful analysis of the current market and the newbuild units, we are confident in our position in the jack-up market. It all comes down to the quality of our fleet, the quality of our people and the strength of our customer base. We maintain one of the youngest fleets in the industry. And as a large portion of the total jack-up fleet approaches 40 years of age, we believe those rigs will exit the market. Age, coupled with technical limitations, removes many units from what we consider to be the competitive jack-up fleet in today's stringent operating environment. Considering the newbuild fleet, only 33% are being built by established drilling contractors. In a post-Macondo world, the NOCs and the IOCs require trained and experienced drill crews and proven operational and safety systems that speculative newbuild companies will not be able to provide. As a result, many of those newbuilds will not be approved for most tender lists worldwide. Rowan has been in business for more than 90 years. And with our focus on continuous improvement, we will continue to be a leading contractor in the industry for many years to come.

And finally, our customers. They recognize the value in our premium equipment. We work diligently to build and strengthen our relationships worldwide through providing safe and reliable operations. And they come to us for their most difficult wells. Even with the ramp-up in new capacity in the near term, we see continued success for Rowan in the jack-up market.

I'd like to briefly mention a few comments about the regions in which we are currently operating, starting with Southeast Asia. We recently signed the contract extension on the EXL IV with Carigali Hess for 1 year at $160,000 a day. The rig will continue operations in Malaysia, and the additional work will carry the rig contract through early 2016. In addition, we are in final negotiations for the J.P. Bussell in Malaysia. The rig is expected to commence operations in early March, immediately following its stay in the shipyard. Both the Gorilla II and the EXL I have options on their current contracts, and we remain in constant communications with the customers regarding those programs.

Now turning to the Middle East. We have 10 jack-ups operating in the region, with 7 units rolling off their existing contracts with Saudi Aramco in 2014. We secured a 10-year contract extension with Aramco for the Bob Keller in November of last year, and we are currently in negotiations for additional extensions. We believe we'll be successful in continuing our long-standing relationship with Saudi Aramco.

All 5 of our active jack-ups in the U.S. Gulf of Mexico will have the opportunity for new contracts in 2014. Recently, the Joe Douglas was committed to LLOG for a 75-day project at $160,000 per day. The EXL III commenced operations for Freeport-McMoRan late last year, and the unit will continue the Davy Jones project through August of 2014. We continue to see increased demand in Trinidad, as the Gorilla III has been extended into the second quarter of 2015 at a day rate of $165,000 a day. The EXL II was also extended with BP Trinidad for 3 years at a day rate of approximately $180,000 per day. Our premium equipment is well positioned in this region.

And finally, the North Sea, all 6 of our jack-ups are contracted, and we're optimistic about our presence in this region.

Our harsh environment, high-spec fleet fits the needs of the market, and we continue to be in discussion with our established customer base for future projects. Operations for the Rowan Stavanger continue with Talisman U.K. And given recent progress reports, the rig will not mobilize to the Norwegian sector until later in the year. Meetings are ongoing for opportunities for the Stavanger, following the accommodations work at the Yuma platform.”

 

Rowan Ultra Deep Water Rig Program

In 2011 Rowan contracted with Hyundi Heavy to construct three ultra-deepwater drillships – all the same design and capabilities, with redundancies in critical systems included duel blow-out preventers.  In 2012 Rowan exercised an option with Hyundi for a 4th similar drillship.   The cost of the 4 drillship program is approximately $3 billion.   This will give Rowan one of the most modern and capable Ultra Deep Water fleets in the industry.  These rigs will dramatically increase Rowans’ cash flow and earnings over the next few years.  

The first three rigs have all secured three year contracts.  Below is a summary. 

Rowan Renaissance – Commenced three year contract in April 2013 with Repsol and operates offshore West Africa at an effective day-rate of $619,000. 

Rowan Resolute – Expected to be delivered in June 2014 and start three year contract with Anadarko to operate in the Gulf of Mexico in September 2014 at effective day-rate of $608,000.

Rowan Reliance - Expected to be delivered in October 2014 and start three year contract with Cobalt to operate in the Gulf of Mexico in January 2015 at effective day-rate of $602,000.

Rowan Relentless- Expected to be delivered in March 2015.   No contract announced yet.  58% of the UDW 10,000 foot plus rigs under construction are under contract.  The

My expectation for the three rigs under contract is to deliver an average of $140 million of cash flow a year based on the existing contracts.    Based on following:  $610,000 average day rate minus $185,000 day operating expenses at 90% uptime is $140 million in cash flow.  For the 4th rig, to be conservative I use a day rate of $500,000 and get approximately $110 million of net cash flow.   So in total an additional $530 million of cash flow from the UDW fleet once all four rigs are in operation in June of 2015. 

Like the jack-up market the drillship market is also becoming bifurcated with UDW ship utilization running in the high 90’s compared with lower rating rigs (less than 5,000 ft.) running at 78% and (5,000 to 7,500) rated rigs running at utilization of around 88%. 

Again, in the year end 2014 call Mark Keller had this to say regarding the contract status and position of the 4th UDW rig, the Relentless:

“I will finish with a few comments on the outlook for the Rowan Relentless. Despite the recent volatility in the ultra-deepwater market, we are well positioned through 2014, as 3 of our 4 new drillships are contracted. We are actively marketing the Rowan Relentless, and we are closely monitoring the contracting window for a midyear 2015 delivery. Currently, we believe there are approximately 29 units that will be available in the months surrounding the delivery of our fourth drillship. However, when comparing the technical capabilities of those ships, we believe only 3 other units could truly compete with the Rowan Relentless, and its dual-stack, 1,250-ton capability meeting leading-edge demand. We're in communication with multiple operators and remain confident that we will contract our fourth drillship at a market-leading day rate, well above our hurdle rate and prior to delivery.”

 

Financial and Valuation Metrics

A couple notes regarding my financial analysis.  I have assumed Rowan does not purchase additional rigs.  They have said their focus will be on reducing debt and dividends once they become free cash flow positive in 2015.  While the company has given CAPX guidance for 2014 it has not for 2015 or 2016.  Normal maintenance CAPX per year is $3 to $5 million per rig, not including any upgrade projects related required for new contracts.   This puts pure maintenance CAPX at $135 million at the midpoint.  I have added $100 million to be conservative for additional projects to existing rigs. 

 

    Rowan      
                                      Valuation Metrics       
    (millions)    
         
  Actual  Pro-Forma Pro-Forma  Pro-Forma
  2013 2014 2015 2016
         
Revenue:        
   Jack-Up  $            1,579  $         1,660  $           1,675  $           1,675
   UDW    $           220  $              725  $              799
Total   $            1,579  $         1,880  $           2,400  $           2,474
         
         
EBITDA   $               587  $           805  $           1,125  $           1,150
         
EBITDA Margin 37.2% 42.8% 46.9% 46.5%
         
Interest   $                 70  $             95  $              150  $              130
CAPX:        
   UDW Build Program   $               229  $         1,512  $              455  
   UDW Comm. Inv. Support     $           200  $                50  $                -  
   Maintenance   $               323  $           380  $              235  $              235
   Dividend     $             50  $                50  $                50
Cash Taxes   $                  9  $             35  $                50  $                60
         
Net Cash Flow   $               (44)  $       (1,417)  $              185  $              725
         
Debt   $            2,008  $         3,008  $           2,823  $           2,098
Cash    $            1,092  $           675  $              675  $              675
Net Debt   $               916  $         2,333  $           2,148  $           1,423
         
Shares                    125      
         
Earnings Per Share   $              2.04  $          2.60  $             4.40  $             4.60
Book Value Per Share   $            39.29  $         41.89  $           46.29  $           50.89
Earnings Multiple at Share Price $30.89                  15.1              11.9                   7.0                   6.7
         
Free Cash Flow Yield  -1.14% -36.81% 4.81% 18.83%
(on current stock value         
of $3.85 billion)        
         
Equity Value (Per Share)        
.6 Times Book (Worst Case)  $            23.57  $         25.13  $           27.77  $           30.53
.8 Times Book (Current Multiple)  $            31.43  $         33.51  $           37.03  $           40.71
1.2 Times Book   $            47.15  $         50.27  $           55.55  $           61.07

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 Increase in Earnings, Free Cash Flow and Book Value over next 2.5 years. 
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