An Offshore Driller Has Hit Turbulent Waters but Smoother Seas Might Be on the Horizon

Rowan Companies  (NYSE: RDC  ) has not had a good second half. The company's shares performed well during the first half of the year as Rowan reported better than expected earnings. Since the beginning of July, the company's shares have underperformed thoes of its similar sized peers, Atwood Oceanics (NYSE: ATW  ) and Ocean Rig UDW (NASDAQ: ORIG  ) and declines have accelerated during the last month or so. However, I believe that investors should not be worried.

Low valuation
Indeed, at present, after recent declines Rowan is now trading at the lowest price-to-book ratio in comparison to its similar sized peers. Why is this important? Well, it is generally considered that if a stock is trading below book value it is cheap. Essentially, if a company is trading at a price-to-book, or P/B value of less than one, then you are effectively buying one dollar of the company's assets for, well, less than a dollar. 

According to, Rowan is trading at a P/B ratio of 0.88, while Atwood trades at a ratio of 1.5 and Ocean Rig trades at a ratio of 0.9. So, Rowan is cheapest on a book-value basis, although only just.

What's more, Rowan's future looks rosy as the company is set to take delivery of four new high-spec ultra-deepwater drillships during the next few years, which could catapult the company's earnings higher. Actually, this is one of those rare opportunities in investing where Rowan's earnings are almost certain to drive higher in the next few years, with very little risk of Rowan not meeting target .

Revenue locked in
In particular, three of Rowan's four new units are already contracted out for delivery, for a day rate of just over $600,000, until 2017. This gives investors a huge amount of clarity of where Rowan's earnings are going to head for the next few years.

All in all, when Rowan's four new units come online, they will add $2.4 million per day to Rowan's revenue, approximately $876 million per year assuming 100% utilization. Rowan's revenue was just under $1.4 billion during 2012, so we can see how much of an effect this will have on earnings.

As I have already mentioned above, with three of these units already contracted out, this revenue growth is almost guaranteed, according to the company's last reported fleet status report.

One of a kind
However, Rowan would appear to be one of the only mid-sized drillers that is looking at this kind of guaranteed revenue growth in the short to medium term. For example, Atwood has four ultra-deepwater drilling units under construction for delivery through 2015, but so far, only two of these units are already contracted out. What's more, the two units already 'on contract' are forecast to bring in less than $600,000 per day for the company .

A cold wind
Meanwhile, Ocean Rig UDW has five units set for delivery through 2015, which will nearly double the company's current fleet. Unfortunately, only three of these five units is on a contract for longer than one year, and one unit is yet to find a contractor.

Ocean Rig does not provide detailed day rates for its units, but what is of concern is the fact that Ocean Rig is facing a contract expiration cliff between 2015 and the first half of 2016. During this period, approximately 80% of Ocean Rig's units are going to come 'off contract,' leaving only two units yet to be delivered contracted out beyond this date. Unfortunately, this leaves Ocean Rig looking vulnerable. Rowan's contracted rigs provides nice security at a time when Transocean, one of the industry's largest participants, is reporting that a 'cold wind' is blowing across the sector as oil exploration and production companies postpone drilling programs in an attempt to force day rates on drilling units down  .

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