Rowan Misses EPS, Beats Rev

Rowan Companies Inc.’s ( RDC - Analyst Report ) adjusted third quarter 2012 earnings from continuing operations came in at 39 cents per share, lower than the Zacks Consensus Estimate of 48 cents. The results were hit by a number of extraordinary items. However, quarterly earnings surpassed the year-ago level of 25 cents.

Notably, total revenue expanded nearly 51% year over year to $353.9 million in the reported quarter, and beat our expectation of $342.0 million. The outperformance was mainly attributable to increased activity from fleet additions and higher utilization of existing rigs between periods.

Dayrates and Utilization

The company’s Gulf of Mexico rigs experienced a dayrate of $120,400 (versus $115,800 in the year-ago quarter), Middle East rigs saw a dayrate of $129,300 (versus $125,400 a year ago) and North Sea rigs showed $250,200 (versus $224,900 in the year-ago quarter).

The overall dayrate of all offshore rigs was $161,500 (versus $148,500 in the third-quarter 2011). Average utilization of the company’s rig improved to 75% from 61% in the year-earlier quarter.

Financials

As of September 30, 2012, the cash balance was $328.3 million and long-term debt (including current maturities) was $1,393.1 million. The debt-to-capitalization ratio was 23.7% versus 25.1% in the prior quarter.

To Conclude

Houston, Texas-based Rowan Companies is a provider of international and domestic contract drilling and aviation services. During the quarter, the company experienced strong demand as well as solid dayrates for high-specification jackups in most of the markets.

Recently, Rowan Companies exercised its option to add a fourth ultra-deepwater drillship to its existing fleet. The company 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.

With a focus on West Africa and the U.S. Gulf of Mexico, followed by East Africa, Rowan is pursuing several prospects for its three uncontracted drillships. Rowan is the seventh largest offshore drilling contractor in the world, while Transocean Ltd. ( RIG - Analyst Report ) leads the pack as the largest offshore drilling contractor.

Considering the volatile macro backdrop along with operational hindrances that could put pressure on the company’s performance in the upcoming quarters, we see restricted upside potential for Rowan’s shares and expect the company to be on par with the industry.

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.