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We are maintaining our long-term Neutral recommendation for Rowan Companies Inc. (RDC - Analyst Report). The company’s strategic initiatives as well as improving fundamentals in the North Sea keep us optimistic, with a volatile macro backdrop along with operational hindrances being dampeners.

Rowan has successfully executed its strategic program to sell its Le Tourneau manufacturing and its Land Drilling businesses. The completion of its Le Tourneau sale as well as its recent agreement to offload its land rigs for $510 million demonstrates the company’s focus on the offshore market.

In our opinion, this move not only enables the company to dispose its non-core assets but also to transform it into a pure-play offshore driller. The transaction will also provide Rowan additional capital for its newbuild program.

Moreover, demand for the higher-spec jackups appears to be increasing, driven by incremental rig demand in the Middle East and South East Asia, and now the Gulf of Mexico (GoM). We believe that Rowan’s earnings and cash flow visibility are expected to remain encouraging in the near-to-medium term on the back of a solid backlog position (backlog of drilling revenue commitments increased 67% to $2.6 billion during the second quarter) and long-term international jackup contracts.

Rowan’s jackups in the North Sea boast of a solid contract backlog, and amid a strong North Sea market, the company has secured a two-year term contract in Norway on N-Class rig almost three years in advance.

Houston, Texas-based Rowan Companies is a provider of international and domestic contract drilling and aviation services. We continue to believe that a surge in demand for offshore drilling activity will be noticeable at the end of this year or early next year. The company is well positioned to capitalize on the favorable trend.

However, concerns related to the volatile macro backdrop along with operational hindrances are expected to be the major risks for the company’s performance in the upcoming quarters. We believe Rowan shares are fairly valued and expect them to perform in line with the broader market.

The company, which competes with peers such as Noble Corporation (NE - Analyst Report) and Ensco Plc (ESV - Analyst Report), holds a Zacks #3 Rank (short-term Hold rating).

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