Wall Street has turned against offshore drillers during the past few months. Many analysts are now forecasting that the industry is about to enter a period of falling revenues, contracting margins, and sliding earnings.
So it has been interesting to read though the conference call transcripts of the offshore drilling companies themselves to get their take on the industry's future.
Rowan Companies (NYSE:RDC) recently released its set of first-quarter results and, on the call, management sounded upbeat about the company's prospects.
Indeed, almost straight away Thomas Burke, president and chief operating officer of Rowan, commented:
I do not foresee any significant changes to our strategy...Although certain sectors or markets have softened in recent months and many new rigs are entering the market, our current backlog, capable young fleet and operational expertise continue to provide a solid foundation for Rowan...
It would seem as if, going by first-quarter results, he is right. Rowan reported earnings of $0.28 per share for the quarter, compared to the consensus estimate of $0.21 per share. Cost of operations was below previous guidance, mainly due to cost control efforts and repair and maintenance projects occurring later than originally planned. The company's operating margin, excluding one-off items, ticked up to 25% from 23%.
Unfortunately, Rowan's revenue for the period came in 4.2% lower than the comparable period for 2013 as two of the company's highest earning jack-up rigs in the North Sea remained out of service. The Gorilla VI was in the shipyard preparing for a three-and-a-half year contract in Norway, and the Gorilla VII returned to service in mid-February following leg repairs and extensive weather delays.
Looking to the future
While Rowan reported a good first quarter thanks to lower costs, doubts still remain about the company's future. Specifically, will Rowan get caught up in the wider industry slowdown, or will the company avoid any repercussions?
Actually, Rowan has already started off the year well and silenced its critics. The company entered 2014 with 19 jack-ups scheduled to roll off contract within the year. To date, four contracts have been successfully extended at higher rates.
In addition, Rowan's newest drilling unit, the drillship Rowan Renaissance, began operating off Namibia during the quarter. The Renaissance is Rowan's first ultra-deepwater ship and one of the most capable in the world.
The rest of the fleet also performed well.
Within the Middle East, Rowan announced the extension of three jack-ups with Saudi Aramco at higher day rates. Four other units are coming off contract within the region throughout the rest of the year and the company is in negotiations with Saudi Aramco over contract extensions.
Rowan's units within the North Sea also reported strong demand. All six operational units have been contracted out, and this is expected to last throughout 2014 and beyond. However, in the Gulf of Mexico, all five of the company's jack-ups will roll up contract in the coming months, but management is optimistic about opportunities within the region. There is also talk that the company will ship some rigs in the Gulf of Mexico to other regions where demand is strong.
On the ultra-deepwater market, management believes that it is well positioned through 2014, with the company's second and third drillships scheduled for delivery later this year on contracts to Anadarko and Cobalt.
Despite the current uncertainties surrounding the ultra-deepwater market, management believes that Rowan's high-spec drillships will continue to report strong demand. The company's fourth new drillship, set for delivery during 2015, has seen significant interest from multiple operators ahead of its delivery.
What's more, Rowan exited April with a near all-time high backlog of drilling commitments of approximately $5 billion. The company will realize around 23% of this backlog as revenue during 2014, 31% in 2015, 23% in 2016, and the balance in 2017 and beyond.
A larger peer is performing better
Unfortunately, Rowan's first-quarter performance pales in comparison to that of larger peer Transocean (NYSE:RIG).
During the first quarter, Transocean's fleet-utilization rate increased to 78% from 75% (Rowan's utilization remained stable at 80%), operating expenses dropped 13%, and the company's effective tax rate dropped from 17.7% to 15.1%.
What's more, unlike Rowan, which is targeting growth through the purchase of new drilling units, Transocean is cutting costs and spinning off assets to drive growth and bolster an impressive dividend payout.
Transocean's divestment plan is already well underway, and the most recent divestment is the spinoff of the company's eight North Sea midwater drilling rigs, which the company will spin off into a new entity called Caledonia Offshore Drilling Company during the next few weeks. .
All in all, Transocean plans to widen margins enough to generate an extra $500 million per annum in profit by the end of 2015 in order to support the company's newly approved annual dividend payout of $3 per share.
So according to Rowan's first-quarter results, it would appear that as of yet the company does not appear to be suffering from the slowdown that is supposed to be affecting the whole drilling industry. That said, the next few quarters will be pivotal for Rowan, and if the company can keep up the cost-cutting measures and contract out units at higher rates, then its future looks bright.
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.