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.

Overhaul
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.

The best way to play offshore drilling?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

 

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers