Rowan Companies, Inc. (RDC): Building upon the legend of Rowan - Goldman Sachs - 11/02/07
What's changed We raised our 2007 EPS estimate to $4.06 from $4.04 due to 3Q2007 outperformance. We lowered our 2008/09E EPS to $4.71/$5.15 from $4.90/$5.56 due lower operating assumptions for LeTourneau and non-operating items. Our 12-month price target is unchanged at $40 (7.1X 2008E EV/DACF).
Implications (1) Rowan announced a bold plan to build six new jackups for $1.1 billion with deliveries scheduled from 2Q2010 through late 2011. We believe management is clearly sending a signal of their bullish view of the market - especially considering the company's two existing newbuilds with 2008 delivery dates remain uncontracted. Rowan also announced a goal of doubling its 21 rig fleet over the next 10 years. Given Rowan's plan to build the rig equipment internally, we would expect "activist" type investors to have less of an interest in the company. We also expect LeTourneau to have less of an external focus going forward since some capacity will be tied up with internal projects.
(2) While we remain concerned with the international jackup market in 2008, Rowan recently signed three contracts that we view as supportive.
(3) Rowan is fairing better than most in the US Gulf of Mexico jackup market due to its highly capable fleet. The Gorilla II is expected to receive a 6-month contract at $195k/day this is 11% higher than the current rate. However, the domestic commodity jackup market remains challenged.
Valuation Rowan shares currently trade at 6.8X/4.9X 2008E EV-DACF/EV-EBITDA, a premium of 18%/4% relative to its closest peer, Ensco.
Key risks (1) Capacity additions could result in lower utilization and dayrates; (2) cost inflation; and (3) a severe correction in commodity prices.
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