Why We're Bearish on Rowan
The high-spec nature of its fleet won't insulate the offshore driller from the woes afflicting the broader rig market.
Offshore driller Rowan (RDC) continues to look highly overvalued, in our view, roughly in line with our assessment for the average driller. Although management has continued to articulate a view that the high-spec nature of its fleet will insulate it from the woes afflicting the broader rig market over the long run, we think this is overly optimistic. Rowan's shares are trading almost 50% above our fair value estimate.
On the one hand, we've been impressed by Rowan's ability to maintain high pricing on its premium jackup rigs. The above 20% gross margins it has maintained of these rigs likely bests all peers (although the figures are not usually reported by drillers). On the other hand, we have been disappointed by the low utilization on Rowan's four latest generation ultra-deep-water drillships. Only one of the four ships is currently working, and market pricing remains viciously competitive.
Broader offshore rig markets still present too strong a headwind against Rowan achieving substantially recovered profitability levels. Although the number of rig retirements in recent quarters has been impressive and will materially reduce rig supply, utilization and pricing cannot be restored without increased rig demand accompanying decreased rig supply. However, because of our below-consensus $55 per barrel West Texas Intermediate long-term oil price forecast, we don't think rig demand recovery will be sufficient to match market expectations.
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Preston Caldwell does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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