Please help my analysis by arguing the bear case in the comments section.
Thesis
- Trading at P/TBV of 0.61 (bottom 2% of its valuation range in past 15 years).
- Current backlog of $5.4 billlion (including all 4 deepwater Drillships contracted until April 2017); 2015 median EPS = 3.77 for a forward P/E of 5.8.
- Young, high specification rig fleet relative to competitors.
Industry Profile:
- Offshore drilling industry is facing near term headwinds with recent retreat in oil prices.
- ~829 mobile rigs available worldwide.
- 513 jack-ups operating worldwide (11% are high-spec) + 135 to be delivered by 2017 (38 of which will be high spec).
- 98 drillships operating worldwide (66% capable of drilling in 10,000 ft of water) + 74 to be delivered by 2020 (72 of which can drill in 10,000 ft).
Company Profile:
- Company was founded in 1923.
- The business makes money by charging day rates for drilling services (equipment & personnel) to oil and gas exploration companies.
- Business drivers are supply and demand for drilling rigs, both of which are driven by oil prices.
- Key profitability drivers are day rates and utilzationrates.
- Operates 30 jack-up rigs (18 high spec, 9 premium, 3 conventional)
- Operates 2 Drillships (+2 to being built Q1 and Q2 2015).
Key risks
- Prolonged slump in oil prices (low to medium risk as there are currently no viable alternatives to long-term energy demand).
- Accident leading to environmental disaster and subsequent regulatory ban (low risk due to the company's 90+ year track record).
Competitors
- RIG, NE, ESV, SDRL, DO, ATW, ORIG.
- Trading at P/B of 0.5 to 0.9; historical medians are 2.0.
- Historical profitability (15 year median ROCE) of 8.2% to 15.7%.
Growth prospects
- Industry is facing near term head winds with oil prices slumping.
- Long-term trend is towards offshore deepwater drillships and high-specification jack-up rigs.
Company details
- Debt-to-Equity is 0.55; Working Capital Ratio is 4.9.
- 15 year median ROCE is 8.5% (on low end vs. competitors).
- Weak competitive advantage; signs of a moat include high startup costs, regulatory approvals to operate, good safety record and a young rig fleet relative to competitors.
- The company must continually reinvest capital in upgrading and maintaining its fleet to stay competitive.
Management
- Return on retained earnings of only 7% over past 15 years.
- Share buybacks at good prices (P/B of 0.8 to 0.9 in Q3 & Q4 2011 vs. historical mean of 1.8).
- Some share dilution.
- Management compensation is mid-pack relative to peers.
- Management has the company focused on growing its deepwater drillship & high-spec jack-up fleet which seems prudent.
Valuation
- Price / Tangible Book Value near all-time low offering great downside protection.
- All 4 drillships are on contract through April 2017 securing earnings.
- Analysts median forward P/E of 5.8 is attractive.
- At least 3x more upside than downside.
Primary information sources
- Latest RDC Annual Report
- Latest RDC Earnings Call
Disclosure
- The author has no positions in any stocks mentioned, but may initiate a long position in RDC over the next 72 hours.