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Rowan Maintained at Neutral

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We maintained our recommendation on Rowan Companies plc (RDC - Free Report) at Neutral on Mar 15, 2013. The company, with its improved rig execution level, stands to benefit from the upward trend in the high-spec ultra-deepwater as well as jackup market and mining equipment orders. However, Rowan’s 2013 guidance of increased costs is a major hindrance to its earnings growth.

Why Maintained?

Rowan, a provider of international and domestic contract drilling and aviation services, and premium high-specification rig fleet enjoys greater utilization than most other shallow-water fleets.

Rowan’s recent fleet status comprises three new contracts with one in the Middle East and two in the GoM.  Among these, Rowan California was awarded a three-year contract by Maersk, jackup EXL III received a two-month contract with Nexen in the GoM, while Rowan Louisiana received a three-month contract, to be employed in the GoM. These contracts received higher dayrates from its previous contracts and will help the company in reducing the rig downtime days and provide impetus for increased operations.

The company has significant exposure to the ultra-deepwater market with three uncontracted drillships that are under construction and slated for deliveries starting late 2013 and through 2014. Rowan’s first ultra-deepwater drillship – Rowan Renaissance – was contracted by Repsol for a period of three years, at dayrates that beat market expectations. Currently, Rowan is pursuing active requirements for 22 ultra-deepwater units with emphasis on receiving a multi-rig package.

Rowan’s deeper focus on high-spec resources, as well as impending tendering activities for multi-year drilling programs in key markets including the North Sea, Southeast Asia and Saudi Arabia, are likely to support the requirement for high-spec units. Long-term growth drivers for Rowan include its high quality fleet and strong relationships with operators.

However, Rowan sees shipyard time in 2013 to increase to around 10% of available days. The company also expects contract drilling expenses to increase by 5% to 7%, while selling, general and administrative expenses to increase by 16% from the last year. The interest expense is also expected to creep up due to the recent debt issue. These factors are likely to have a negative impact on the company’s revenue and investor sentiment.

Other Stocks to Consider

While we prefer to remain on the sidelines for Rowan, there are other stocks in the sector that appear rewarding. Among these, Stone Energy Corporation , Range Resources Corporation (RRC - Free Report) and EPL Oil & Gas, Inc. , are expected to perform impressively over the next few months, and carry a Zacks Rank #1 (Strong Buy).

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