Rowan Companies' Transformation Continues

Rowan Companies has transformed itself over the past few years, and the last stage of the transformation should send earnings surging.

Jul 8, 2014 at 9:39AM

Prior to 2008, Rowan Companies (NYSE:RDC) was a completely different entity than the one we know today. Everything changed for the company in early 2009 when it decided that the best way forward was to focus on offshore drilling. This strategy was spearheaded by recently retired CEO Matt Ralls.

The first part of the plan was to undertake a $3 billion high-specification jack-up new build program, including the acquisition of the company's revered N-Class rigs. After that came the divestments of Rowan's manufacturing and land drilling businesses.

To increase its competitive strength, the company moved its headquarters to the UK and virtually eliminated its corporate tax liabilities. Rowan's filings say that the shift helped to cut the company's effective tax rate to 3.3% in 2013, down from 34.6% in 2008.

The last phase, which is still in progress, is the construction of four best-in-class ultra-deepwater (UDW) drillships.

Strategy unfolding
The first of Rowan's new UDW drillships was delivered at the beginning of this year. The Rowan Renaissance commenced operations on April 22, 2014, an important moment for the company.

Unfortunately, the unit experienced problems almost straight away and was forced to take seventeen days off during the second quarter of 2014 for issues with its subsea systems. Nevertheless, the unit got straight back to work after the systems were repaired and no further issues are expected.

The rest of Rowan's four new drillships are expected to be delivered over the next few quarters, with the last delivery slated for the first quarter of 2015.

Industry trends
While Rowan is celebrating the successful launch of its first drillship and the final stage of its turnaround plan, other industry players are getting worried. The drilling industry continues to experience a glut of supply and lack of demand, and this is hitting profits.

Both Maersk Drilling, subsidiary of The Maersk Group (one of the world's largest shipping conglomerates), and Seadrill have recently warned on the state of the offshore drilling industry. The two industry behemoths have cautioned that the day rates for UDW drillships could fall as low as $450,000 within the next few months, compared to a peak of $650,000 reported last year.

No company is more aware of this slowdown than Transocean (NYSE:RIG). The company's most recent fleet status update does not make for good reading.

Lower rates
At the beginning of June, Transocean released a fleet update revealing that the four drilling units that it had contracted out during the period were all contracted out significantly below their previous rates.

The company's Dhirubhai Deepwater KG1 vessel was signed to a three-year contract at a dayrate of $440,000, 14% below the rig's prior dayrate of $510,000. The Paul B. Loyd, Jr. was awarded a two-year contract extension at a dayrate of $430,000, 4% below the rig's prior dayrate of $447,000. GSF Development Driller II was awarded a three-well contract at a dayrate of $360,000, a staggering 41% below the rig's prior dayrate of $606,000. Finally, GSF Constellation II's customer exercised a one-year option at a dayrate of $165,000, unchanged from the previous rate.

However, Rowan Companies isn't worried.

The game-changer
Rowan has been working hard during the past year to sign its new drillships on long-term, high-rate contracts, locking in a revenue boost for the company. The aforementioned Rowan Renaissance is contracted out from March 2014 to March 2017, at a day rate of $619,000.

This is a game-changer for Rowan. At the end of the first quarter, the company reported an average day rate across all of its rigs of $171,000. A rate of $619,000 locked in for several years should really put a rocket under Rowans earnings.

There is more to come as well, as the other three drillships come online. All three are locked into contracts at similar rates, for similar durations.

Foolish summary
As Rowan completes its transformation, the company is set for explosive earnings growth. There is no denying that Rowan's transition over the past few years has been impressive, but investors should really start to see the benefits over the next few quarters.

As Rowan brings its new drillships online, earnings should improve as the company's average day rate achieved jumps. This is especially likely as the company has managed to avoid much of the slowdown that is impacting the rest of the industry.

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Rupert Hargreaves owns shares of Rowan Companies. The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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