From Dain:
RDC:SB-Avg;ANOTHER ROUND OF RATE IMPROVEMENTS
GOM Jackup Market Strengthening: Rowan recently received contracts for
two of its 350-foot jackups in the GOM at dayrates in the mid-$60,000s. Prior
rates for these units were in the $55,000-$60,000 range. We had anticipated
this magnitude of a rate jump to occur in the second quarter, so these
fixtures are slightly ahead of our schedule. Dayrates for standard jackups
are also continuing to improve, with new fixtures in the $50,000-$55,000
range.
Rowan has recently contracted the harsh-environment jackups Gorilla III for
120 days work in GOM with Anadarko (NYSE: APC; SB-Agg; $63.50) after it
completes a two-week workover job. The estimated rate for the Gorilla III is
in the $80,000-plus range once it moves to Anadarko, with a lower rate on the
workover job. However, the Gorilla III is starting about two weeks behind our
previous estimate.
International Outlook For Harsh Environment Rigs Improving: Rowan
recently returned from a marketing trip to the North Sea. It appears that
demand for harsh environment jackups is improving, with additional supply
possibly needed for Q3 and Q4. Rowan indicated interest from Shell, BP (NYSE:
BP; SB-Avg; $50.23), Phillips (NYSE: P; B-Agg; $53.50), and others, interest
confirmed by conversations with other drillers. Demand also looks to be
improving in Eastern Canada--a market that needs Gorilla class rigs. There is
a potential for Rowan or a competitor to move another harsh environment
jackup to that market by Q3/Q4. When the market requires a Gorilla or
comparable rig, the dayrate leverage is substantial. The Gorilla IV is
currently working in Eastern Canada at a rate in the $110,000 range, and we
have seen other harsh environment fixtures, when working in these conditions,
as high as $130,000-$160,000.
Rowan Is Building Two High-Performance Land Rigs: These 2,000 hp units
will be equipped with state-of-the-art drilling equipment and are scheduled
to commence operations in April (for the first rig) and June/July (for the
second). The estimated costs are $8-$12 million, with the first rig slightly
lower due to surplus equipment on hand. However, the staggering feature of
these rigs is that their initial jobs are at $20,000! This is well above
market and in excess of what replacement cost pricing should theoretically
be.
ERA Is Back On The Slope Again: Rowan's aviation unit is flying six
aircraft on the North Slope, the first time ERA has worked there in six
years. Additionally, the GOM helicopter market is strong, and there are
rumors of the largest competitor raising pricing.
Stock Opinion
We believe most segments of the world's offshore drilling markets will face a
capacity shortage during 2001/2002, driving dayrates to replacement levels.
We believe the market will begin to discount that trend in the shallow water
market this year. Our analysis of trading multiples in previous up-cycles
shows offshore drillers peaked at approximately 7.5x replacement cycle
EBITDA. Based on our estimate of $748.8 million replacement cycle EBITDA
(before incremental earnings contribution from the Gorilla VIII), we derive a
stock price target of $56 per share. |
