A firm making a move
Despite our negative outlook on jackups, we've been pleasantly surprised
by premium jackup driller Rowan's recent moves. We've been impressed
with the new CEO Matt Ralls, as in his short tenure, he has landed
strong rig contracts in a weak drilling environment, broke with
long-standing Rowan tradition and indicated that the company will stack
rigs during this downturn if needed, and shored up the company's
liquidity with a timely $500 million debt offering. The debt offering
will mainly provide a backstop for the company's aggressive
rig-construction program, but Ralls indicated Rowan may purchase a
deep-water rig if the opportunity presents itself.
The deep-water expansion would be another first in Rowan's 80-plus year history, and in our opinion, potentially highly profitable. We'd prefer to see Rowan develop its own unique rig design, similar to what Ensco International has done, along with the approach Rowan uses for its jackups. We believe this approach lets the driller capture additional value through re-engineering the rig to perform similar work at a lower cost than peers', or by focusing on specific high-end markets. However, because Rowan is extremely late to the deep-water rig market, its best expansion avenue is through purchasing a deep-water rig from a distressed seller. It may be difficult to find a bargain as many of our drillers have ample cash hoards, as well, and will likely bid up rig prices. Still, the deep-water market offers increased business stability (deep-water contracts are typically far longer than jackup contracts) and a new growth avenue for Rowan. On the other hand, Rowan will face challenges qualifying for lucrative deep-water tenders, which sometimes require extensive prior deep-water drilling experience and an already-established relationship with the customer. We expect Rowan to continue to share updates on its deep-water plans during the next year.
Companies worth considering
Overall, our top picks in the industry are Transocean, FMC Technologies,
and National Oilwell Varco. None of the firms trade below our Consider
Buy price, but they do trade substantially below our fair value
estimates, and may be worthy of further consideration. All three
companies have narrow moats, and we believe the firms with the strongest
competitive advantages will deliver the best performance during the full
commodity cycle. Further, the companies will benefit from the
substantial build-out of deep-water projects, as they supply the
essential rigs and equipment required.
