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Analyst Blog

We reaffirmed our Neutral recommendation on Rowan Companies plc (RDC - Analyst Report) on Jun 17, 2013. The company’s premium high-specification rig fleet enjoys greater utilization than most other shallow-water fleets. However, the company’s 2013 guidance of increased expenditure remains a major concern.

Why Maintained?

Rig owner, Rowan is advantageously positioned to benefit from the growing demand in the global jackup market with the current worldwide utilization of 86%. The ever-increasing tendering activity has also increased the dayrates. It has eight contract rollovers in 2013, which will further help in reducing the rig downtime days and provide impetus for increased operations.

Rowan’s deeper focus on high-spec resources, as well as impending tendering activities for multi-year drilling programs in key markets including the North Sea, Southeast Asia and Saudi Arabia, are likely to support the requirement for high-spec units.

With its improved rig execution level, Rowan stands to benefit from the upward trend in the high-spec jackup market and mining equipment orders. Long-term growth drivers for Rowan include its high quality fleet and strong relationships with operators.

Rowan has significant exposure to the ultra-deepwater market with two uncontracted drillships that are under construction and slated for deliveries starting late 2013 and through 2014. Rowan’s first ultra-deepwater drillship – Rowan Renaissance – was contracted at a higher-than-expected dayrate. Currently, Rowan is in pursuit of 19 opportunities for three of its uncontracted newbuild drillships, with emphasis on receiving a multi-rig package, within the 2014 contract window. Of the total, 4 are under discussion.
 
However, as per the company’s 2013 guidance, contract drilling expenses are predicted to increase by 5% to 7%, while selling, general and administrative expenses are likely to increase by 16% from the last year. The interest expense is also expected to rise due to the recent debt issue. As a result, Rowan’s earnings will most likely be affected when these higher costs are taken into account.

Other Stocks to Consider

While we prefer to remain on the sidelines for Chesapeake, there are other Zacks Ranked #1 (Strong Buy) stocks – Hornbech Offshore Services, Inc. (HOS - Snapshot Report), Newpark Resources Inc. (NR - Snapshot Report) and Gulfmark Offshore, Inc. (GLF - Snapshot Report) – that are expected to perform impressively over the short term.
 

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