Rowan's Premium Fleet To Drive Growth Despite Low Oil Prices

On May 23, 2016, we issued an updated research report on Texas-based Rowan Companies plc (NYSE:RDC) .

Rowan’s deep focus on high-spec resources, along with impending tendering activities for multi-year drilling programs in key markets including the North Sea, Southeast Asia, Australia and Saudi Arabia, will likely support the requirement for high-spec units. Further, Rowan’s strong relationship with Saudi Aramco, the largest oil company in the world, which intends to boost production significantly, will also augment the company’s order backlog. Currently, nine of the company’s rigs are operating for Saudi Aramco. Rowan lacks risk diversification due to its high dependence on one company.

Rowan successfully contracted four of its newbuild drillships. This represents its venture into the ultra deepwater space. Each of the rigs is expected to work through at least 2017 on current contracts. The market’s inclination for high-specification assets favors the company, as the majority of its fleet comprises high-end premium jackups with a long-term strategy in place. Long-term growth drivers for Rowan include its high quality fleet and strong relationships with operators.

Rowan has reduced its cost estimates and also projects a lower out-of-service time. The remarkable cost-control effort by the company is a major positive in the current scenario of falling commodity prices. For 2016, the operating cost is estimated to reduce by $90 million and selling, general and administrative cost is expected to fall by $10 million.

Rowan’s premium high-specification rig fleet enjoys greater utilization than most other shallow-water fleet. We believe that the company, with its improved rig execution level, will benefit from the high-spec jackup market and mining equipment orders.

However, the majority of oil majors have been forced to reduce their operations and cut expenses to combat the freefall in oil prices. Thus, we expect Rowan’s earnings to be adversely impacted as well. Any contract extensions on the shelf in the Gulf of Mexico will be at significantly lower dayrates and will also be for a shorter period.

Rowan reiterated its estimated planned out-of-service time for full-year 2016 at 3–6% for its jack-ups and drillships, subject to fleet repositioning and market conditions. However, any increase in this figure will have a negative impact on the company’s operations.

Moreover, Rowan’s ability to favorably renew or sign new contracts will depend on future market conditions. If current newbuilds are contracted at low day rates and/or standard jackups remain idle, Rowan’s profitability would be lowered.

Stocks to Consider

Currently, Rowan carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the oil and gas sector include CVR Refining, LP (NYSE:CVRR) , Murphy USA Inc. (NYSE:MUSA) and Braskem S.A. (NYSE:BAK) . All these stocks sport a Zacks Rank #1 (Strong Buy).


MURPHY USA INC (MUSA): Free Stock Analysis Report

BRASKEM SA (BAK): Free Stock Analysis Report

ROWAN COS PLC (RDC): Free Stock Analysis Report

CVR REFINING LP (CVRR): Free Stock Analysis Report

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