Rowan Companies (RDC, Financial), which provides offshore oil and gas contract drilling services, is an excellent stock to consider for the long term. This article looks at some of the key investment positives related to the company.
The first point I want to mention is that Rowan Companies has declined by 32% in 2014 and I believe that the correction is overdone. The reasons discussed below will make my point clear on why I believe that the correction is overdone.
Rowan Companies currently trades at an EV/EBITDA of 8.5, which is lower than Seadrill (SDRL, Financial), which is trading at an EV/EBITDA of 9.2 and Pacific Drilling, which is trading at an EV/EBITDA of 8.7. I am also bullish on Seadrill and Pacific Drilling, but from a valuation perspective, Rowan Companies has more upside than the peers.
Coming to the fundamental points for believing that Rowan Companies is an excellent buy for the long term, the company’s quality assets provide the first major reason for being bullish on the company.
Currently, Rowan Companies has 19 high specification jack-ups, which is the highest in the industry. High specification jack-ups have significant market potential as it aids in drilling challenging wellbore designs at low cost. Further, with industry regulations getting tighter, the demand for high specification jack-ups in increasing and this is positive for Rowan Companies.
Besides the high specification jack-ups, Rowan Companies also has 4 high specification drillships (with two BOP stacks and 1250 ton hook load path) and is only second to Transocean (RIG, Financial) in terms of having the number of drillships with the said specification.
Further Rowan Companies also has 8 premium-jack-ups along with 3 commodity jack-ups. The company’s fleet is therefore top class and positioned to deliver even better results when the offshore drilling market recovers.
The second big reason to be bullish on Rowan Companies is the current order backlog and the revenue visibility it provides. As of September 2014, Rowan Companies had an order backlog of $5 billion with the contract backlog extending into 2018. The contract backlog with strong counterparties ensures that Rowan Companies revenue and cash inflow will be steady in the coming years.
Rowan Companies has also been performing well on the financial front even in a challenging market condition. For the third quarter of 2014, Rowan companies reported revenue growth of 22% to $468 million as compared to $383 million in 3Q13. With the delivery of new UDW rigs in 2014 and the likely delivery of another UDW rig by March 2015, strong revenue growth will continue for Rowan Companies into 2015 and 2016.
Another positive factor about Rowan Companies is the current debt profile, which gives Rowan Companies high financial flexibility. The company projects total debt to capitalization and net debt to capitalization to be 35% and 34% respectively for 2014. This means the Rowan Companies has high financial flexibility for funding future growth.
The company’s debt maturity profile is also comfortable and it ensures that there is no immediate debt refinancing concern or debt repayment burden. As of September 2014, Rowan Companies had a debt of $2.8 billion with debt maturities starting only in 2017.
In terms of concerns, the company’s operating cash flow for the first nine months of 2014 declined to $200 million as compared to $392 million for the first nine months of 2013. However, the decline in cash flows is primarily due to increase in receivables and not due to significant drop in day rates.
I believe that operating cash flow will be more robust in 2015 when 4 new UDW are operational for almost the full year. The OCF also depends on the recovery in oil prices and day rates. I do believe that oil prices have bottomed out and are likely to trend higher from current levels. This should be positive for offshore drillers.
In conclusion, Rowan Companies is an interesting stock to consider with quality assets. The company is trading at attractive valuations and the stock is likely to move higher as oil price recover along with recovery in the offshore drilling sector. The current levels look attractive for long-term exposure to the stock.
