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.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2992127, ~/Articles/ArticleHandler.aspx, 8/30/2015 8:49:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Mark Holder

Mark has been writing for TMF since Dec. 2012 with a primary focus on taking advantage of opportunities provided by the market in the energy and tech sectors.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
FCX $10.50 Up +0.31 +3.04%
Freeport-McMoRan C… CAPS Rating: ***
RDC $17.81 Up +1.14 +6.84%
Rowan Companies, I… CAPS Rating: ***