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newratings.com  Feb 24  Comment 
WASHINGTON (dpa-AFX) - Rowan Companies Inc. (RDC) released earnings for fourth quarter that retreated compared to the same period last year. The company said its earnings totaled $9.2 million, or $0.08 per share. This was down from $119.1...




 

Rowan Companies (NYSE:RDC) is an oilfield services company that operates 29 onshore deep-well drills and 23 offshore shallow-water jack-ups.[1] It also manufactures drilling rigs and equipment, as well as heavy machinery for the the forestry, mining, and steel industry through its wholly-owned subsidiary, LeTourneau Technologies Inc.

Rowan benefits from rising oil prices, as they increase demand for the limited number of drilling rigs in the world, driving up dayrates and increasing the company's revenues and income. With only shallow-water rigs in its offshore portfolio, though, LeTourneau is missing out on the fastest-growing, highest-margin sector of the oilfield services industry: deepwater oil exploration. In the Gulf of Mexico, the company's dayrates declined because shallow-water demand subsided, but this was offset by dayrate growth in the North Sea, which requires the high-spec, harsh environment jack-ups that Rowan specializes in. The company has kept capital expenditures and operating costs down thanks to its ownership of LeTourneau, which helps supply its drilling segment with rigs and parts at low cost. However, Rowan announced in March 2008 that it will divest LeToureau, ending this symbiotic relationship. Rowan Companies competes with drill contractors like Transocean and Nabors Industries, with drill manufacturers like National-Oilwell Varco, and with heavy equipment manufacturers like Caterpillar and Deere & Company.

Company Overview

Business Financials

In 2009, RDC posted total revenues of $1.8 billion, a decline from its 2008 total revenues of $2.2 billion. This in turn had a negative impact on RDC's net income. Between 2008 and 2009, RDC's net income declined from $428 million in 2008 to $368 million in 2009.

Business Segments

Rowan Companies operates two divisions: Drilling Operations and Manufacturing Operations.

Drilling Operations (68.6% of 2009 Revenues)[1]

Rowan's Drilling Operations division is an oilfield services company. Rowan Drilling operates 23 offshore jack-ups with water depths ranging from 250 to 550 feet and well depths ranging from 20,000 to 35,000 feet. It also operates 29 deep-well onshore rigs, with drilling depths of 18,000 to 35,000 feet. Rowan Drilling has rigs in the Gulf of Mexico, the Middle East, Trinidad, the North Sea, offshore eastern Canada, and offshore West Africa.

Manufacturing Operations (31.4% of 2009 Revenues)[1]

Rowan's Manufacturing Operations division, LeTourneau Technologies Inc., operates in two separate segments.

  • Drilling Products and Systems (DPS): This segment makes oilfield services equipment, specializing in high-performance, harsh environment jack-ups, as well as many of the smaller equipment and parts needed to service the rigs.
  • Mining, Forestry, and Steel Products (MFSP): This segment makes heavy machinery for the mining, forestry, and steel industry. Its steel-plate making business converts scrap metal to high-end steel. It built all 21 of Rowan's jack-ups.

Trends and Forces

Rising Oil Prices are Driving Up Oilfield Services Dayrates, Especially for Offshore Drilling

Oil and gas prices have fluctuated heavily over the past few years, though since mid-2007, the trend has been up. As oil prices rise, E&P companies are desperate to ramp up production, causing demand for drilling rigs to skyrocket.

Without Deepwater Oil Exploration Technology, Rowan is Missing Out on the Highest-Growth Sector of Oilfield Services

Despite the fact that Rowan's dayrates rose overall, in certain regions they actually fell because of the changing dynamics of the oilfields. The maximum water depth to which any of Rowan's rigs can drill is 550 feet, making the company's rigs only capable of operating on the shallow Gulf Shelf. Historically, the Shelf has been responsible for much of U.S. oil and gas production; in 2007, for example, it was responsible for 7.6% of U.S. oil production and 10.2% of U.S. gas production. These production numbers, though, are part of an overall decline in production rates since 2003. The Minerals Management Service (MMS) estimates that production in the region will fall from 329,000 barrels per day to 182,000 barrels per day in the next nine years - a decline of 55%, and a big reason why many of the oil majors are leaving the shallow shelf for deeper waters.[2]

Deepwater oil exploration is becoming increasingly important to upstream petroleum companies, as they move from mature regions with declining reserves in search of new places to expand production. While deepwater exploration is risky, with the average success rate for striking hydrocarbons in the deepwater Gulf at just 45%,[3] the rewards can be great. In April of 2008, for example, Brazilian oil major Petrobras discovered a deepwater oilfield reputedly containing 33 billion barrels of oil equivalent (though more research will be needed to fully assess the field's worth).[4] There are very few deepwater rigs in the world, so these pieces of capital can contract for upwards of $800,000 per day.[5] Rowan's focus on harsh environment drilling, however, means it lacks the equipment to see demand and dayrates really rise in the Gulf of Mexico. While the company's jack-ups are ideal for the turbulent North Sea oil fields (indeed, the company's North Sea rigs saw average dayrates of $241,000[6]), the Gulf of Mexico is a relatively calm region, except during the hurricane season. Going forward, for oilfield services companies to grow in the Gulf, they will have to offer rigs with either the ability to extract more from mature wells or to drill in deeper waters - neither of which Rowan's nine rigs in the area can do.

Competition

Rowan competes in several industries.

In the oilfield services industry, Rowan is a niche player, with a small fleet size composed of only a few types of rigs. Its competitors include:

  • Transocean - This drilling behemoth has 138 offshore rigs, including 10 high-spec jack-ups and 56 standard jack-ups[7], as well as 48 deepwater rigs.[8]
  • Noble: 86% of Noble's fleet of 66 rigs were deployed internationally in early 2007[9], with its markets ranging from the Gulf of Mexico to India, Mexico, the North Sea, the Middle East, and West Africa.
  • Diamond Offshore Drilling: 21 of Diamond's 44 rigs were deployed in the American Gulf of Mexico[10], with the rest divided between Brazil, Malaysia, Australia, New Zealand, Egypt, Vietnam, the North Sea, and the Middle East.
  • Nabors Industries - Nabors is one of the largest onshore drilling companies in the U.S., with 535 land drilling rigs; the company also contracts 51 offshore rigs.[11] Aside from oilfield services operations, Nabors is one of the few companies that drills for geothermal resources.
  • Unit - Unit Drilling owns 129 land rigs with depth ranges from 5,000 feet to 40,000 feet in Wyoming, Utah, Colorado, New Mexico, Texas, Oklahoma, Kansas, and Louisiana. Most of these rigs are designed to drill for natural gas, and are either used by Unit Petroleum or contracted to other E&P companies.[12]

Rowan's Drilling Products and Systems segment competes mostly with National-Oilwell Varco, the world's largest rig builder; National-Oilwell Varco has a 60% share of the rig equipment industry, and 90% of all rigs worldwide have some NOV part or another.[13]

Rowan's Mining, Forestry, and Steel Products segment competes with Caterpillar and Deere & Company, both of which build heavy machinery. Caterpillar specializes in mining equipment, while Deere & Company has a forestry equipment segment.

References

  1. 1.0 1.1 1.2 RDC 10-K 2009 Item 1 Pg. 3
  2. Access My Library: "The Gulf of Mexico shelf: still a cash flow machine: majors out, independents in.(GULF OF MEXICO)(Cover story)"
  3. Oil Savvy
  4. MarketWatch: "Petrobras cautions more data needed on oil find"
  5. Energy Current: "Deepwater rig day rates hit new high", November 9th, 2007
  6. RDC 2007 10-K, Page 30
  7. Yahoo! Finance: "Transocean Inc. Provides Fleet Status Report", April 4th, 2008
  8. International Herald Tribune, July 24th, 2007
  9. Reuters, Noble Corp NE
  10. Diamond Offshore Drilling Inc DO
  11. Reuters Full Description: Nabors Industries Ltd NBR (NYSE)
  12. Unit Web Site: Rig Fleet Map
  13. Morningstar Analysis, National-Oilwell Varco, January 10th, 2008
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