Rowan Companies Inc. ( RDC - Analyst Report ) recorded adjusted second-quarter 2011 earnings of 38 cents per share, breezing past the Zacks Consensus Estimate of 33 cents but showing a deterioration from the year-earlier profit of 75 cents.

Total revenue declined 20.8% year over year to $223.5 million in the reported quarter, and also failed to match up to our expectation of $368 million.

Operational Performance

The company’s drilling operations generated revenues of $223.5 million in the quarter, down 20.8% year over year, mainly due to lower average day rates. However, the gross drilling margin decreased to 53% from 63% in the year-earlier quarter. Operating income plunged substantially by 57% to $51.7 million from the year-earlier level.

Rowan's discontinued drilling operations’ revenues jumped 5.2% on a year-over-year basis to $48.5 million. Operating income also decreased 9.5% to $3.8 million from the year-earlier level.

Rowan's discontinued manufacturing operations’ external revenues declined by a drastic 31.9% on a year-over-year basis to $110.2 million. Operating income increased substantially to $657.8 million from $4.8 million reported in the year-earlier level.

The company’s underperformance was mainly related to the effects of rig start-ups, several of which have happened or will happen later than the company expected largely due to delays related to more painstaking customer acceptance tests and regulatory approval and civil unrest in the Middle East.

The company’s North Sea rigs experienced an average dayrate of $195,300 (versus $269,300 in the year-ago quarter) while the overall dayrate of all offshore rigs was $133,300 (versus $174,500 in the second-quarter 2010). Average utilization of the company’s offshore was 70% versus 75% in the year-earlier quarter.

Financials

In the trailing six months of 2011, cash balance was $711.3 million and long-term debt (including current maturities) stood at $1,160.1 million. Debt-to-capitalization ratio was 21.3% versus 23.6% in the prior quarter.

Outlook

We remain optimistic on the company’s premium high specification rig fleet that enjoys greater utilization than most other shallow water fleets. Hence, we believe that significant earnings leverage could be achieved with increased tendering activity.

Rowan’s enhanced focus on high-spec resources as well as impending tendering activities for multi-year drilling programs in the North Sea, Middle East and South-East Asia are likely to support the requirement for high-spec units. In this respect, Rowan’s first two N-class jack-up rigs started operations in the North Sea in June and also made an entry into the Southeast Asia market with an objective to start operations in the latter part of 2011. The company also anticipates improvements in utilization and day rates in 2011 for offshore rigs.

While the majority of Rowan’s fleet is considered to be high-end premium jackups, the company is also a proven offshore driller, with a long-term strategy in place.In the reported quarter, the company achieved development on several strategic fronts. It completed the sale of its LeTourneau manufacturing business and reached an agreement to sell the land drilling division.

As part of the expansion, the company has ordered two ultra-deepwater drillships. Further, the company has increased its backlog revenue commitments by 67%, which shows the potential for the coming years.

Currently, we maintain our Neutral recommendation for Rowan owing to concerns related to lower average day rates across its operating areas.

Rowan, which competes with peers such as Noble Corporation ( NE - Analyst Report ) and Ensco Plc ( ESV - Analyst Report ) , currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.