Rowan Companies Shifts to the Deepwaters

Editor's note: This article has been updated

After decades as an onshore and shallow water drilling specialist, Rowan Companies plc (NYSE: RDC  ) is quickly shifting toward a mix of deepwater drillships. The company has four ultra-deepwater (UDW) drillships either recently starting operations or under construction. With the recent announcement of a contract for the last of the four drillships, the driller now has secured contracts for all of the UDW ships through mid-2017.

The recent contract signed with Freeport-McMoRan Copper & Gold (NYSE: FCX  ) has mostly positive indications for Rowan, which is good as the company began the year with a substantial amount of rigs rolling off contract. 

Good and bad
The contract Rowan signed with Freeport-McMoRan is generally positive for Rowan and even provides Freeport-McMoRan with a cheaper dayrate for drilling new exploratory wells. The deal is also interesting in that it lowers the contract duration to only two years from the standard period of three (and up to five or six years in some cases.) The contract value of $425 million averages to a dayrate of somewhere around $550,000, assuming normal mobilization fees that would reduce the effective dayrate.

Considering the general weakness in the deepwater market and the concerns that new rigs might not find acceptable deals, this contract is a home run. The bad news is that any driller spending over $600 million on a new drillship clearly wants a longer contract out the gate. Rowan now has to remarket the ship in a couple of years; this will increase its marketing expenses, but may also allow the company to contract in a better market at that time.

Economic impact
At around $550,000 a day, a contract for a UDW ship is equivalent to roughly three of the current jack-ups in a fleet of 30 for Rowan. With the four drillships under contract, the company has now secured a solid revenue stream once construction is completed on the last two ships during 2015. Prior to this deal, Rowan only had 46% of revenue days for 2015 booked. Along with a couple of other recent jack-up contracts that obtained higher dayrates on extended contracts, Rowan is now set up for a solid 2015 after starting 2014 with serious concerns.

The impact to Freeport-McMoRan is minimal, though clearly the contracting terms were more favorable than the deals with Noble for dayrates of $610,000. At $550,000 a day, the company saves nearly $60,000 a day, or roughly $1.8 million a month. The number is essentially immaterial to the massive copper miner, which has nearly $2 billion in monthly revenue, however. Oil exploration is still very much a secondary focus of the firm.

Bottom line
The terms on deepwater contracts are more favorable to the oil exploration firms, but the contract terms of this deal aren't nearly as dire to the deepwater drillers as most analysts feared months ago. Rowan still needs to overcome some near-term contract concerns with jack-up rigs, but the deals are more amenable for those with the right rig. With the company's stock trading near multi-year lows, this deal provides more solid evidence of a brighter future, especially with its stock only trading at 7.5 times forward earnings.

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