Rowan Companies (NYSE: RDC ) currently looks like a diamond in the rough. While analysts believe that the offshore drilling sector is heading toward a slowdown, Rowan's earnings are expected to expand more than 100% between now and 2015.
The company is currently trading at a price to book value of 0.8. On the face of it, Rowan appears to be a great investment opportunity .
The question is, is Rowan actually as valuable as it seems? Rowan might appear to be a no-brainer investment, but nothing is ever that clear cut.
Dragged down by peers
One of the threats that could impact Rowan is a deterioration in net asset value. Specifically, it is likely that as the rig market enters a recessionary period, the value of the company's rigs will fall and have to be readjusted on the balance sheet.
Analysts at Barclays have suggested that many drillers could see the net asset values of some rigs revalued lower by as much as 40% before support is found. This implies that Rowan's book value per share could fall from $39.40 to a low of around $24, which would hurt the case for investment; I should point out that this is a worst-case scenario.
The other issue that could impact Rowan is the current oversupply in the jackup market.
Rowan is a leader in the high-spec jackup drilling market. So far, jackup day rates have held up in comparison to those of floating units. However, the jackup order book now stands at 140 units and only 20% of these have been contracted out.
With this huge amount of capacity coming to market, it's likely that jackup rates will come under pressure. Almost all of Rowan's units are based around the jackup model, so as extra capacity comes to market the company could be hit hard.
Having said all of that, Rowan does have four new ultra-deepwater high-spec drillships coming online during the next year or so. Three of these ships are already contracted out, partially de-risking Rowan's future earnings growth.
What's more, Rowan's experience within the drilling industry could underpin growth during the next few years.
National Oilwell Varco (NYSE: NOV ) , one of the offshore drilling industry's leading suppliers, recently reported its first quarter results. During the earnings conference call, the company's management highlighted a worrying trend developing within the industry.
The company notes that a significant amount of new deepwater rigs have been launched recently with new crews, and this is becoming a problem. These crews and the rigs are operating under tighter operational requirements post-Macondo, and many crews are inexperienced.
To profit from this trend and assist the industry, National Oilwell is opening new technical training colleges to train both its own and customers' personnel. The company is also supplying simulators to let drillers practice safe, efficient drilling offline.
This implies that Rowan, with its experienced crews, could see demand for its services remain robust, despite the surge of new rigs coming into the market. This actually makes a lot of sense as Rowan's crews are likely to be able to drill in a safer, faster, and more efficient way than the newer crews.
With that in mind, it could be the case that Rowan moves through the slow-down without coming under much pressure.
It seems as if Rowan's outlook is not as bad as some are forecasting. A lack of experience within the industry will help keep demand for the company's services high.
That being said, Rowan is still open to the impact of declining asset values, and this could become a drag on Rowan's balance sheet. Nevertheless, the company's experience and reputation within the industry, along with new additions to the company's fleet, will underpin growth during the next few years.
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