Let us now discuss some of our energy investments. Rowan Companies (RDC) is an off-shore drilling rig owner and operator. RDC provides offshore oil and gas contract drilling services utilizing a fleet of 30 self- elevating mobile offshore “jack-up” drilling units and four ultra-deepwater drillships, two of which are currently under construction. Until this year, Rowan focused on high-specification and premium jack-up rigs, which its customers use for exploratory and development oil & gas drilling. A couple of years ago, RDC signed contracts with Hyundai Heavy Industries for the construction of four ultra-deepwater drillships. In January 2014, the company took delivery of the first of these drillships, the Rowan Renaissance. The Renaissance commenced drilling operations under a three-year contract in the deep waters off the coast of West Africa in April 2014. The last of the four new drillships will be delivered in March of 2015, and all four of the new ships are under firm, multi-year contracts.
With the acceptance of the fourth drillship next March, RDC will have among the youngest fleet of ultra- deepwater (UDW) drillships and high-spec Jackup rigs in the market. This is an important factor because oil & gas exploration & production companies will likely migrate to the youngest and best possible rig for a given job, should oil prices continue to decline or even stabilize around the $80/barrel level.
Rowan’s young fleet is outfitted with some of the most advanced and safest equipment of any offshore rig. For example, all four of RDC’s new UDW drillships come with dual blow-out preventers, which could have helped prevent the horrific Deepwater Horizon accident in the Gulf of Mexico in 2010. Additionally, the drillships will be self-propelled vessels equipped with computer-controlled dynamic-positioning thruster systems, which allow them to maintain position without anchors through the use of their onboard propulsion and station-keeping systems.
Despite the decline in Rowan’s stock price over the past few months, our earnings expectations, as well as Wall Street’s analysts who follow the company, point to higher EPS over the next couple of years. For instance, the consensus EPS estimate for this year is $2.16, but that increases to $3.93 and $4.09, respectively, for 2015 and 2016. Furthermore, Rowan has roughly 76% and 68%, respectively, of its 2015 and 2016 revenue expectations under firm contract. As a side note, Ensco has roughly 75% and 51%, respectively, of its 2015 and 2016 revenues under contract. Atwood has 92% and 71%, respectively, of its 2015 and 2016 revenues under contract.
Current market sentiment toward energy companies, particularly to offshore rig companies, is obviously very negative. However, when the average small-mid-cap stock trades at roughly 30x earnings, we would rather allocate capital to companies like RDC which we believe is trading at close to 5x each of the next two year’s earnings expectations. Even if we are wrong and RDC earns $3.00 in 2016, the stock trades at nearly 7x earnings. In our opinion, RDC’s earning power is greater than $3.00.
From FPA Capital Fund (Trades, Portfolio) Q3 2014 Commentary.
