Rowan Disappoints in Q3

Rowan Companies Inc. (RDC - Analyst Report) recorded third-quarter 2011 earnings of 25 cents per share, failing to meet the Zacks Consensus Estimate of 39 cents and showing a deterioration of nearly 51% from the year-earlier profit of 51 cents.

Total revenue declined 1.6% year over year to $234.7 million in the reported quarter, and also failed to match up to our expectation of $261 million.

Operational Performance

The company’s drilling operations generated revenues of $234.7 million in the quarter, down 1.6% year over year, as overall activity levels and average day rates changed only slightly despite additions to its offshore fleet. However, the gross drilling margin decreased to 45% from 55% in the year-earlier quarter. Operating income plunged 57% to $32 million from the year-earlier level.

Rowan's discontinued manufacturing and land drilling operations increased to $162.4 million from $7.0 million in the year-earlier period income.

The company’s underperformance was mainly related to the delay in rig moves and upgrades in new contract processing. The higher repair and maintenance expense related to most upgrade projects further hurt the performance.

The company’s North Sea rigs experienced an average dayrate of $224,900 (versus $194,900 in the year-ago quarter) while the overall dayrate of all offshore rigs was $148,500 (versus $147,300 in the third-quarter 2010). Average utilization of the company’s offshore was 61% versus 72% in the year-earlier quarter.

Financials

In the trailing nine months of 2011, cash balance was $892.6 million and long-term debt (including current maturities) was $1,147.9 million. Debt-to-capitalization ratio was 20.7% versus 21.3% in the prior quarter.

Other Activities

Rowan also announced the exercise of its option for the third ultra deepwater drillship with Hyundai Heavy Industries Co. Ltd. (“HHI”) with delivery scheduled for the fourth quarter of 2014. The drillship is estimated to cost $600 million.

The agreement with HHI also includes an option exercisable in February 2012 for an additional drillship of the same specification scheduled for delivery in first half of 2015.

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 deeper 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 jackup 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 by year-end 2011. The company also anticipates improvements in utilization and day rates in 2012 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. As part of the expansion, the company has ordered one ultra-deepwater drillship.

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.

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