Rowan Posts Impressive 3Q - Analyst Blog

Rowan Companies Inc. (RDC) reported third-quarter 2010 earnings of 57 cents per share, well above the Zacks Consensus Estimate of 51 cents and the year-earlier profit of 54 cents. The result was aided by solid contract drilling operations and a lower effective income tax rate. We have adjusted the prior-year quarter's results for 15 cents per share net tax benefit.

The quarter's revenues of $437.9 million increased nearly 11.3% year over year, but missed the Zacks Consensus Estimate of $441 million.

Operational Performance

The company's drilling operations generated revenues of $289.9 million, up 12% year over year, thanks to offshore fleet additions and higher land rig utilization. This was partially offset by lower average day rates. However, gross drilling margin decreased to 51% from 53% in the year-earlier quarter. Operating income increased marginally to $82.9 million from the year-earlier level of $81.1 million.

External revenues for Rowan's manufacturing operations jumped 10% on a year-over-year basis to $148.0 million. Gross manufacturing margin increased to 15% from 13% in the year-earlier quarter. However, operating income declined more than 11% to $5.3 million from the year-ago level of $6.0 million.

The company's North Sea rigs experienced an average dayrate of $194,900 (versus $209,200 in the year-ago quarter), while the overall dayrate of all offshore rigs was $147,300 (versus $182,500 in the third-quarter 2009). Average utilization of the company's offshore and land rigs were 72% and 84%, respectively, versus 59% and 56% in the year-earlier quarter.

At the end of the quarter, cash balance was $917.8 million and long-term debt (including current maturities) stood at $1,684.2 million, while debt-to-capitalization ratio was 31.4%.

Outlook

We remain optimistic on the company's premium high specification rig fleet, which enjoys greater utilization than most other shallow water fleets. Hence, we believe that significant earnings leverage could be achieved with increasing tendering activity.

During the third quarter, Rowan wrapped up its acquisition of Norway's Skeie Drilling & Production ASA and added three of the world's most capable jackups to its fleet. Additionally, the company raised $1 billion of new financing during the quarter to refinance the assumed Skeie debt and complete the newbuild program. Therefore, it remains well positioned for further growth opportunities. LeTourneau also expects continued strong demand for new mining equipment.

Rowan also added considerably to the contract drilling backlog, and achieved two three-year contracts with Saudi Aramco and an additional deep-well commitment from McMoRan in the Gulf of Mexico.

Currently, we maintain our Neutral recommendation for Rowan as we believe all the above positives are already priced in.