EUR 850.00 For Business Accounts Only

Morningstar | A 2Q of Weak Gross Margin Dampens Operating Results Heading Into Rowan-Ensco Merger

No-moat Rowan posted a net loss of $14.3 million in fourth-quarter 2018 and closed the year with its first annual operating loss since the dawn of the offshore drilling downturn in 2014. Direct operating costs were flat for the company as a whole in 2018 vs. 2017, despite the sequential revenue decrease of 36%. In particular, the deepwater segment was weak (with a nearly negative 100% gross margin) owing to an average utilization rate of 30% for the year. Operating costs for the deepwater unit remained high because Rowan kept its rigs ready instead of cold stacking them. However, existing contracts indicate that utilization should be much stronger in 2019.

Management updated its estimated synergies in the upcoming Rowan/Ensco merger increased from $150 million to $165 million per year, primarily driven by onshore cost reductions and lower insurance costs. Regarding the impending merger, we anticipate completion of the combination with Ensco in the first half of 2019, following shareholder approval last week and clearance from U.S. and U.K. regulators.

Following the release of the February fleet status report, Rowan showed off an impressive array of new contracts and contract extensions for floaters and jackups alike, in line with a trend we have seen this quarter in increased utilization. Another takeaway of note from the report was the differentiated pricing for new contracts: while spot market rates were consistently near their floor (similar to competitors), long-term rates for contracts extending into 2021 were priced at higher day rates. This positive indicator shows that customer expectations, similar to management expectations, point toward a recovery in rates for the sector going forward.