Investors Shouldn't Be Worried About This Recent Decline

Rowan Companies has not had a good second half. The company's shares performed well during the first half of the year as the company reported better than expected earnings but since the beginning of July, the stock has underperformed the market with declines accelerating in the last month or so. However, I believe that investors should not be worried

Indeed, Rowan's future looks rosy as the company is set to take delivery of four new high-spec ultra-deepwater drillships during the next few years, which will catapult the company's earnings higher. Actually, this is one of those rare opportunities in investing where Rowan's earnings are almost certain to drive higher in the next few years, with very little risk of Rowan not meeting target.

Revenue locked in
In particular, three of Rowan's four new units are already contracted out for delivery, for a day rate of just over $600,000, until 2017. This gives investors a huge amount of clarity of where Rowan's earnings are going to head for the next few years.

All in all, when Rowan's four new units come online, they will add $2.4 million per day to Rowan's revenue, approximately $876 million per year. Rowan's revenue was just under $1.4 billion during 2012, so we can see how much of an effect this will have on earnings.

As I have already mentioned above, with three of these units already contracted out this revenue growth is almost guaranteed, according to the company's last reported fleet status report.

One of a kind
However, Rowan would appear to be one of the only mid-sized drillers that is looking at this kind of guaranteed revenue growth in the short to medium term. For example, the company's close peer, Atwood Oceanics has four ultra-deepwater drilling units under construction for delivery through 2015; but so far, only two of these units are already contracted out. What's more, the two units already 'on contract' are forecast to bring in less than $600,000 per day for the company.

Actually, although Atwood reports that the estimated day rate for these units will be between $580,000 and $595,000, a side note in the company's most recent fleet status report notes that upon delivery from the shipyard, both units will be mobilized in the Mediterranean at a day rate of $400,000 to $420,000, significantly below their projected day rates.

A cold wind
Meanwhile, Ocean Rig UDW has five units set for delivery through 2015, which will nearly double the company's current fleet. Unfortunately, only three of these five units is on a contract for longer than one year and one unit is yet to find a contractor.

Ocean Rig does not provide detailed day rates for its units, but what is of concern is the fact that Ocean rig is facing a contract expiration cliff between 2015 and the first half of 2016. During this period, approximately 80% of Ocean Rig's units are going to come 'off contract,' leaving only two units yet to be delivered contracted out beyond this date. Unfortunately, this leaves Ocean Rig looking venerable at a time. Transocean, one of the industry's largest participants, is reporting that a 'cold wind' is blowing across the sector as oil exploration and production companies postpone drilling programs in an attempt to force day rates on drilling units down.