Rowan Shares May Be In A Position To Rebound
Rowan is an English offshore driller with a fleet of 30 Jack-ups and four deep water rigs. With a relatively young fleet, the company has gained some acclaim for its high day rates.
(Image from investor presentation)
Although institutional investors are adding to their stakes, a recent sell off has sent shares to their lowest level since 2010. Not helping the share price are sales by a handful of insiders.
Down 22 percent in year to date, Rowan may be worth looking into on a valuation basis.
Industry Concerns
The weakness in Rowan’s share price correlates with a selloff in peers. Diamond Offshore and Transocean, for example, have given up even more ground. Investors are troubled by both demand uncertainty from oil production companies to contract rigs and the effect of additional supply hitting the market in coming months.
Deutsche Bank outlined these concerns in an April research report on the industry. One positive mentioned was the high price of oil, but the commodity has since sold of sharply. “While demand is more elastic and continued high oil prices should continue to support strong levels of activity, supply growth begins to accelerate dramatically in the 2nd half of this year and continues through 2017.”
However, with stocks inexpensive compared to historical levels, BMO capital upgraded the sector in July. Analyst Alan Laws writes, “potential for a surprise demand uptick now outweighs already price-in risks of further weakening."
Valuation
Simple ratio analysis shows that price/earnings, price/cash and price/book are all well below the energy equipment industry average. In addition, analysts see the company performing almost twice as well as peers over the course of the next year. It is worth noting TTM growth was disappointing.
Rowan recently restarted a quarterly dividend at $0.10 per share for the first time since 2008. Some interpret the reinstatement as a sign of financial health. More than 20 percent of earnings are being returned to shareholders with the dividend.
Expert Tim Melvin of The Deep Value Letter recently suggested Rowan on valuation. Known for investing in stocks the market grossly undervalues, he cites that the company is trading at just 70 percent of its tangible book and has a liquidation value of $21.75. The liquidation value sets a floor price for shares while trading below tangible book leaves a lot of room for additional upside.