Rowan Orders Fourth Drillship

Houston-based drilling contractor Rowan Companies plc (RDC - Analyst Report) has exercised its option to add a fourth ultra-deepwater drillship to its existing fleet. Hyundai Heavy Industries Co., Ltd. will build this GustoMSC P10,000 design drillship for Rowan.

The new addition to Rowan’s fleet will be constructed at the South Korea shipyard and is scheduled for delivery in March 2015. The drillship is estimated to cost about $620 million including commissioning, project management and spares.

The drillship will have additional riser of 2,000 feet, which will facilitate operations in water depths of about 12,000 feet. Upon delivery, the drillship will help in curtailing the non-productive time as a second blowout preventer (BOP) will be fitted for this purpose.

Rowan is likely to incur costs related to operational training and personnel ramp up before the well becomes operational. Taken together, the costs for the additional riser and BOP as well as for workforce upgrade and training are likely to touch $75 million.

The total cost of the fourth drillship for the company is expected to increase by approximately 6% versus the first three drillships, mainly due to equipment price escalation and an anticipated increase in labor cost.

Rowan also has another option agreement with Hyundai Heavy Industries for a fifth drillship, to be exercised in the fourth quarter of 2012. It is likely to be delivered in the third quarter of 2015.

Rowan’s first ultra-deepwater drillship, the Rowan Renaissance was recently contracted for three-years. It is still under construction at Hyundai Heavy Industries with delivery scheduled in late 2013. The second and third drillships are expected to join the company’s fleet in the second and fourth quarters of 2014, respectively.

With a focus on West Africa and the U.S. Gulf of Mexico, followed by East Africa, Rowan is pursuing about 16 prospects for its other two uncontracted drillships. Rowan is the seventh largest offshore drilling contractor in the world, while Transocean Ltd. (RIG - Analyst Report) is the world's largest offshore drilling contractor.

Rowan holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. Longer term, we maintain a Neutral recommendation on the stock.