Rowan Companies' (NYSE:RDC) shareholders have every right to be displeased with the company's performance during the past few years. Indeed, even over the last ten years the company's share price has only risen 60%, lagging the S&P 500 by 8%.
What's more, the company only offered a dividend from 2005 to 2008, when it was cut to preserve cash during the financial crisis. So, based on the fact that the S&P 500 has yielded 2% on average since inception, on a total return basis, Rowan has significantly underperformed.
In addition, according to numbers from GuruFocus.com, Rowan's earnings per share over the past ten years have been erratic to say the least, ranging from -$0.08 to $5.8 with a mean of $2.9 and a median of $4.
So overall, Rowans investors have been on a wild ride with little to show for it. However, could things be about to change for the company?
The constant search for new commercially viable oil reserves is driving oil exploration to ever more dangerous drilling environments. From ultra-deepwater, or UDW, drilling to drilling in the artic, oil and gas exploration and production companies now need the most advanced deepwater capable technology they can get their hands on. In addition, according to some estimates, UDW oil production is expected to expand from 1 million barrels per day currently, to 5 million over the next few years.
One of the world's largest offshore drilling companies, Seadrill (NYSE:SDRL) has risen to this challenge, and investors are reaping the benefits. In particular, as of July this year Seadrill had 22 new units under construction, including nine drillships, two harsh environment semi-submersibles, and 11 high specification jack-ups. In addition, the company has fixed priced options for two additional UDW units. Although this seems like a large number of additional units to add to the company's fleet, Seadrill is confident. Indeed, while 261 new drilling units have entered the offshore drilling market since 2005, the utilization rate of these drilling units has been a consistent 100%.
And this is where Rowan is placing its bets for growth during the next five years or so. In particular, at present Rowan has four new UDW high-spec jack-up drillships under construction in South Korea. These units are set for delivery between the end of this year and 2015. Upon delivery, these new units will be the most advanced in Rowan's fleet and should boost the company's bottom line significantly. Actually, this effect should be felt as soon as Q2 2014 as the Rowan Renaissance, the unit set for delivery at the end of this year is already contracted out from March 2014 to March 2017, at a day rate of $619,000 .
Now, a day rate of $619,000 is a game changer for Rowan. Currently, as reported at the end of the fiscal third quarter, the company's average day rate was $169,200, less than one third of the rate that the new units will provide. With four new drillships in the company's fleet, each demanding day rates upwards of $600,000 Rowan's top and bottom lines are likely to rapidly expand as the new units come online.
Based on the fact that these new drillships are going to boost Rowan's bottom line during the next few years, Rowan's share price could be due for a rerating. Ensco (NYSE:VAL) is one of Rowan's closest peers, and the company has one of the newest UDW floater fleets in the business. So, on that basis it is viable to suggest that Rowan could trade at a similar valuation to Ensco when the company's new units come online.
Unfortunately, on current enterprise value, or EV multiples, Rowan looks expensive compared to peer Ensco. In particular, Rowan currently trades at a historic EV/EBITDA ratio of 9.3. Ensco on the other hand trades at a historic EV/EBITDA ratio of 8.5.
However, current Wall Street estimates predict that when all of Rowan's new units have come online, the company will earn $5.10 per share during 2015. This translates into a forward EV/EBITDA multiple of 4.9 for 2015, at current prices.
All in all, this indicates that as its new units come into service, Rowan's shares could double from current levels if their valuation moves into line with the company's closest peer Ensco.
All in all, Rowan's shareholders have not had an easy ride during the past decade. That said, things could be about to change for the company as its new UDW drillships come online. These new units should boost the company's bottom line and send earnings soaring.