With the gas boom coming to a stall in North America, many companies are confrontoing a slowdown in the demand for their services. While some companies have found a way to curb market trends and readapt, others continue to struggle. Firms that have specialized in unconventional gas exploration and production are now in need of finding new shale to exploit, or perish under market pressure. Many have looked at Vaca Muerta in Argentina as an opportunity to balance accounts, but not all have been fortunate enough to enter this restricted market. Rowan Companies (NYSE:RDC) is one businesses that continues to struggle, and if guided by gurus’ transactions, prospects for growth remain grim.
Mixed News and Trimmed Target Price
Rowan Companies has posted a few new improving signs for overall performance. Its Jp Bussell platform has won a contract in Malaysia, while Rowan Stavanger was granted a contract extension for an additional month in the UK. Landing an industry landmark, the Rowan Renaissance drillship is the first in the world to have earned ABS’ Integrated Software Quality Management.
- Warning! GuruFocus has detected 2 Warning Signs with RDC. Click here to check it out.
- RDC 15-Year Financial Data
- The intrinsic value of RDC
- Peter Lynch Chart of RDC
However, this positive news is offset by Gorilla V and VI’s increased off time rate in excess of two months total. To ease the effect, Hank Boswell’s previously scheduled 28 days off rate time for inspections has been deferred. Additional difficulties were met by Gorilla VII by the continued out-of-service period following leg damage sustained as it was moving locations in July, compounded by poor weather conditions in the North Sea that hampered the rig's ability to return to its operating location.
An important indicator for future performance is target price. Even though the value assigned by each financial institution may not correspond with each other, trends can be identified in order to deduce prospects for growth. Cowen and Company, Societe Generale and Sandford C. Bernstein have all trimmed the target price for Rowan Companies stock price. While the first institution posted a target price of $34, the second stopped at $35, and the last fixed it at $38 after trimming $3 off the original value.
Lagging Behind the Market
The potential for growth associated with Rowan Companies is minimal to none. Management will argue that a solid entrance into the ultra-deepwater rig market eventually should improve its returns on invested capital. Also, that is a strong competitive characteristic in its best-in-class rigs. However, what interests shareholders the most are positive financial results that materialize in cash rewards.
In that respect, Rowan Companies has not performed well at all. Let us recall the firm halted dividend increments in 2009, and has since paid a meager $0.10 in the character of quarterly dividend. Additionally, difficulties have been identified in overall performance due to rising drilling expenses, operating costs, and operating costs. Most importantly, management has not secured high day rates for newbuild assets, setting great doubts over future profitability.
Rowan Companies currently trades at 16.6 times its trailing earnings, the stock carries a 17% premium to the industry average. Additionally, debt continues to rise while net income remains low and return on assets is below the industry average, prompting the position reductions by the two largest shareholders, First Pacific Advisors (Trades, Portfolio) and FPA Capital Fund (Trades, Portfolio), during 2013.
Last, Rowan Companies activities are plagued by cyclical volatility and high dependence on one client. Those characteristics and the stock's unstable performance requires a great deal of attention by investors. Investors looking to make a long-term investment should stay away from this stock, as one decision by ARAMCO and a late investor reaction could send the investment down the drain, having rewarded small cash dividends along the way.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.