Rowan Companies (RDC, Financial) is among the few offshore drilling stocks that I recommended when this sector's price was depressed significantly. From a low of $11.23 on Feb. 11, Rowan has surged by 54% to $17.3.
The rally has been backed by higher oil prices and fundamental factors specific to the company.
As I have mentioned several times in the past, the key analysis in challenging times is the company’s credit profile. If the company’s credit health remains strong, navigating the crisis becomes easy.
Therefore, strong credit health for Rowan is the first factor that will continue to keep the overall momentum bullish for the stock. The following points should contribute positively to the company’s credit health.
- As of April, Rowan had total order backlog of $3.1 billion that extends through 2024. The backlog is front-end loaded, and this will ensure that EBITDA and cash flow remain robust in the coming quarters. In other words, the company’s debt servicing metrics are also likely to remain robust.
- Rowan Companies has no capital expenditure commitment and with maintenance capital expenditure of just $170 million to $180 million for fiscal year 2016, the company’s free cash flow is likely to be positive. This will help Rowan build a strong cash buffer or reduce debt in the coming quarters. Just to put things into perspective, the company’s cash position was $484 million as of December 2015, and it increased to $595 million by March. I expect strong cash buildup to continue.
- In the coming years, Rowan has $358 million of debt maturing in 2017 and $397 million in debt maturing in 2019. As the company’s cash buffer expands, these debt maturities will not need refinancing, and I expect Rowan to reduce debt in the next 12 to 24 months. Further, according to the company, current cash and projected cash flows from existing backlog exceed all debt maturity through 2021. Therefore, there are minimal concerns on the credit front.
While these are some positive credit-related factors, another key point to note here is that Rowan has an excellent asset profile. The company currently has 19 high-specification jackups, and this is positive from an asset utilization perspective. In the current downturn for the industry, high-specification assets have a significantly higher utilization rate as compared to medium- or low-specification assets that might not be in compliance with all regulatory standards.
It is also important to note here that Rowan has mentioned in its presentation that the company is seeking opportunistic asset acquisitions. With a strong financial profile, I see the company acquiring high-specification assets at attractive prices from distressed sellers. This will make the company well positioned for better times.
Rowan is among the best stock picks in the offshore drilling sector and with no speculative new rigs in its pipeline, the company’s financial health is likely to improve in difficult times for the industry. Even after the big rally from oversold levels, Rowan is worth considering with a medium- to long-term investment horizon.
Disclosure: No positions in the stock.
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