RDC $41.18
Oil Driller Rowan To Get Rid Of Manufacturing Unit
Monday March 31, 6:43 pm ET
Marilyn Much/Investor's Business Daily
Oil and gas companies have stepped up the search for new supplies, fueling strong demand for drilling service providers to help do the work.
Drilling contractor and related equipment manufacturer Rowan (NYSE:RDC - News) is cashing in on a couple of fronts.
Shares rose 8.7% Monday when the company announced it will divest itself of its manufacturing unit.
If the deal goes through, the company says it will buy back at least $400 million in stock.
Rowan provides contract drilling services to oil and gas companies using a fleet of 21 self-elevating mobile offshore drilling platforms, or jack-up rigs, and 29 deep-well land rigs.
Its manufacturing arm is called LeTourneau Technologies. LTI produces drilling products, including jack-up rigs, mud pumps and variable speed motors. It also makes equipment for the mining and timber industries. Products include large wheeled front-end loaders and diesel-electric powered log stackers.
The unit has designed and produced all of Rowan's jack-up rigs. It also makes gear for outside customers. It's designed or built about 33% of all jack-up rigs in operation worldwide, the company says.
Though LTI has been a strong contributor, the company on Monday said it would pursue a "monetization" of LeTourneau, meaning the unit will either be sold, spun off or taken public by an IPO.
"Given LTI's record performance in 2007 and strength heading into 2008, we believe that now is the appropriate time for Rowan to crystallize the value we have created in LTI for the benefit of shareholders," said Chief Executive Daniel McNease in a statement Monday.
In the fourth quarter, the unit's revenue climbed 93% from the prior year.
"They'll be looking to sell some portion of the business up to 100%, either through a private transaction or capital markets transaction like an IPO or a spinoff," said analyst Tom Curran of Wachovia Capital Markets. "We think it's a positive because the discernible benefits of owning its own rig equipment manufacturing division didn't seem to meaningfully outweigh the costs."
Lehman Bros. and Morgan Stanley will assist Rowan in the process.
Investors cheered the news, sending Rowan's shares soaring.
Rowan focuses on so-called high specification, premium jack-up rigs used for both exploratory and development drilling. Depending on the particular rig and location, it's capable of drilling to depths of up to 35,000 feet in water up to 550 feet.
Executives weren't available. But, like a lot of its peers in the drilling services business, Rowan is benefiting from high oil and gas prices and its customers' aggressive search for more supplies.
From 2005 to 2007, earnings have grown at a 112% annual clip and revenue has increased at a 45% rate.
Its customers have a lot of cash to spend, says analyst Michael Henzi of Sterne, Agee & Leach.
And judging from the company's results, many of them are spending big bucks with Rowan.
Fourth-quarter earnings climbed 86% from a year ago to $1.23 a share, buoyed by higher jack-up rig usage and increased drilling rates. Revenue jumped 52% to $623.6 million.
During the quarter, the utilization rate of its offshore rigs was 97%, up from 81% the prior year.
The company's average offshore day rate rose 14% to $164,300. The day rate is the daily cost the customer pays Rowan for renting the drilling rig and the associated costs of personnel and routine supplies.
Its land rig utilization rate was 94%, off from 95% a year earlier. Its average land rig day rate rose 1% to $23,000 vs. the prior year.
As of Feb. 28, Rowan's backlog of drilling contracts stood at about $2.1 billion.
For the full 2007, earnings rose 48% to $4.09 a share.
High oil and gas prices throughout the year had a positive impact on results, said CEO McNease in a conference call.
"We expect to see a continuation of high prices during 2008, if worldwide demand for oil and gas continues to pressure supply," he said.
This scenario enables Rowan's customers to invest heavily in exploration and production, resulting in strong demand for premium drilling equipment, he added.
Another plus: He says demand for high-specification jack-ups remains strong in the Middle East, the North Sea and other overseas markets.
Rowan is the world's No. 8 drilling contractor and the No. 6 jack-up rig operator, the company says.
It distinguishes itself by focusing on the high-spec, heavy-duty end of the market across all three of its businesses, says analyst Curran.
"Of Rowan's 21 jack-up rigs, 10 are high-spec, heavy-duty units designed to efficiently execute the most technically challenging wells being drilled today, including ultra-deep gas wells and extended, horizontal wells," he said.
He says seven of these rigs are capable of operating in the world's deepest and/or harshest shallow water basins.
Off-the-record comments by Rowan's customers indicate it has the best quality jack-up rigs and crews, says analyst Henzi.
"As such, Rowan often receives a slight premium for its jobs vs. similar rigs for competitors," he said.
Rowan plans to add nine jack-up rigs to its fleet with deliveries starting in this year's third quarter and continuing through 2011.
In addition to its focus on the high-spec, heavy-duty end of the market, Rowan differs from its peers on other fronts. It's the only U.S. publicly traded company in its field that offers exposure to both land and offshore contract drilling, says Curran.
Still, its jack-up drilling business is Rowan's bread and butter. Curran figures this business will account for 52% of his estimated 2008 revenue for Rowan.
Rowan is also the only U.S. publicly traded company in its field that offers the combination of contract drilling services and manufacturing, he adds.
LTI has given Rowan an edge over its rivals, watchers say.
"Its manufacturing arm allows them the ability to take rigs into repair and repair them at their own schedule, and they are rarely late," said Henzi. "It also allows them to have a cost for their rigs lower than anyone else."
Followers expect Rowan to keep growing at a rapid clip.
Analysts polled by Thomson Financial expect 2008 earnings to rise 15% to $4.71 a share, then another 15% in 2009.
Rowan's McNease says the worldwide jack-up market is strong with demand outpacing supply.
"We believe that a current forecasted supply deficit of 44 to 58 jack-ups exists worldwide for projects in 2008 and 2009," he said in a conference call.
