Risk-to-Price Commentary: Rowan Cos. Inc.
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Bond Selection And Technicals
In our April 11, 2014, review of the North American energy sector, the Global Markets Intelligence (GMI) team identified the 'BBB-' rated Rowan Cos. Inc. 4.75% senior unsecured bond, maturing Jan. 15, 2024, as offering good risk-adjusted returns relative to other bonds with a similar profile.
The note had a Risk-to-Price (R2P) score of 70, ranking in the second quartile and exceeding the subsector's average percentile (see table 1).
Table 1
| R2P Score Ranking History | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| --Rowan Cos. Inc. 4.75% 1/15/2024-- | ||||||||||
| Period | Quartile | Percentile | Rating | Subsector average percentile* | ||||||
| One month | 2 | 74 | BBB- | 57 | ||||||
| One week | 2 | 64 | BBB- | 60 | ||||||
| One day | 2 | 59 | BBB- | 60 | ||||||
| *Energy subsector. Source: S&P Capital IQ. | ||||||||||
The bond's probability of default (PD), currently 0.013%, has been lower than the energy sector's average, currently at 0.17% over the last month, since inclusion into the R2P universe. The bond's historical 20-day price volatility (BP Vol.) has generally been in line with the sector's average. The current BP Vol. is 0.40%, lower than the sector's average of 0.44%. The bond has an option-adjusted spread (OAS) of 214 basis points (bps), wider than the sector average (210 bps) (see charts 1-4). The note offers a yield of 4.4% and duration of 8.1 years.
Chart 1
Chart 2
Chart 3
Chart 4
Rowan's share price decreased by 4% over the last year, underperforming the S&P 500 energy sector's 18% gain (see chart 5). In our R2P analysis, we have observed an inverse correlation between equity price and obligor PD, whereby an increase in share price can lead to a lower PD and, subsequently, a higher relative rank for an issuer's bonds.
Chart 5
Since issue on Jan. 6, 2014, the Rowan Cos. Inc. 4.75% 2024 bond's price increased 2% (see chart 6).
Chart 6
The bond can be called at any time until Oct. 14, 2023, with a make-whole premium based on a comparable U.S. treasury +30bps.
Issuer Analysis And Credit Metrics
Rowan Cos. Inc., the U.S.-based oil and gas offshore drilling company, owns and operates a midsize fleet of jackup rigs across North America, Central America, Asia, and Northern Europe. As a result, the company benefits from good geographic diversity, and derives the majority of its revenues outside the U.S. The company also has solid revenue visibility and has already contracted a large proportion of future revenues according to Standard & Poor's Ratings Services (see "Rowan Cos. Inc.” published April 24, 2013). Rowan recently made attempts to enter the more profitable ultra-deepwater segment--offshore deepwater drilling--which, in our view, is likely to increase revenue and diversify the company's operations base.
On Feb. 27, 2014, Rowan Cos. Inc. reported 2013 net income of $253 million, compared with $181 million in 2012. Earnings increased in line with higher revenues and a slightly better operating performance, while the bottom line was also positively impacted by a gain on an asset sale.
Analysts polled by S&P Capital IQ expect the company's 2014 net income to increase as the company reaches towards the ultra-deepwater drilling segment (see chart 7). The company's earnings have grown at a slower rate than that of the indexed energy sector since 2010
Chart 7
The operating income-to-revenue ratio remains high relative to peers', despite dipping in 2011. Since 2011, the company's operating performance has risen gradually (see chart 8). Revenues have increased year-over-year since 2011.
Chart 8
Rowan Cos. Inc.'s cash from operations has been fairly steady, except for a drop in 2011 due to higher-than-usual capital expenditure. Cash balances have been high in recent years, following an increase in debt at the end of 2012. The company also has $750 million in available credit facilities, supporting its strong credit quality (See chart 9).
The company's total debt has increased over our observed period, partly due to the capital intensive requirements aligned with drilling operations, and partly due to the company's strategic aims to further involvement in the ultra-deepwater segment of the drilling market. The leverage ratio declined in 2013 as a result of higher EBITDA, but remains higher than peers'. The leverage ratio dropped to 3.4x from 3.9x at the end of 2012 (see chart 10). The company has a lower burden of debt in its capital structure than its peer group's average.
Capital expenditures play a significant role in the energy industry, and Rowan's capital expenditure has exceeded cash from operations in some years over our observed period. As a result, debt has partly funded capital spending. Despite its cash generation, the company's large capex has resulted in negative (or barely positive) free cash flow generation, which is below the average of its peer group. We consider the company to have had good access and a good track record in capital markets to fund these expenditures, which we view as elevated due to its current strategic aims (see chart 11).
Rowan's interest coverage has decreased over the last few years as a result of higher levels of debt. In recent years, the higher levels of debt have more than offset the increases in EBIT, resulting in a lower coverage ratio. The interest coverage ratio is lower than its peers' (see chart 12).
Chart 9
Chart 10
Chart 11
Chart 12
Rowan's return on capital has slowly increased since 2011, in line with rising EBIT. However, the company's increase in total capital--following its 2012 debt issue--slightly offsets this increase (see chart 13). The return on capital is lower than peers'.
Chart 13
Rowan's credit metrics perform well compared to its peers' (see table 2).
Table 2
| Metrics Comparison | ||||||
|---|---|---|---|---|---|---|
| Rowan Cos. Inc. | Average peer group | |||||
| Revenue (mil.$) | 1,579 | 4,353 | ||||
| Operating income/revenue (%) | 20.01 | 15.62 | ||||
| Free operating cash flow/total debt (%) | 0.79 | 5.47 | ||||
| Debt/EBITDA leverage (x) | 3.42 | 2.68 | ||||
| EBIT/interest expense (%) | 4.53 | 7.79 | ||||
| Return on capital (%) | 2.94 | 5.68 | ||||
| Last 12 months of available data. Source: S&P Capital IQ. | ||||||
Table 3
| Bond Description | ||||
|---|---|---|---|---|
| Security | Rowan Cos. Inc. 4.75% 1/15/2024 | |||
| CUSIP/ISIN | 779382AR1/US779382AR14 | |||
| Currency | USD | |||
| Amt. outstanding (mil. $) | 400 | |||
| Country | U.S. | |||
| Rating | BBB-, Stable , No CreditWatch | |||
| S&P Liquidity Index | 98.27 | |||
| Sector | Energy | |||
| Subsector | Energy | |||
| Industry | Energy equipment and services | |||
| Yield (%) | 4.4 | |||
| Duration (years) | 8.1 | |||
| Seniority | Senior unsecured | |||
| Issue date | 1/15/2014 | |||
| Maturity date | 1/15/2024 | |||
| Coupon dates | Jan. 15, July 15 | |||
| Coupon rate | 4.750 | |||
| Coupon type | Fixed | |||
| Coupon freq. | Semi-annual | |||
| Increment | 1,000 | |||
| Call | 10/15/2023 | |||
| Next | 10/15/2023 | |||
| Price | 100 | |||
| Make Whole | Yes | |||
| End Date | 10/14/2023 | |||
| Spread | 30 | |||
| Put | No | |||
| Next | - | |||
| Price | - | |||
| Poison Put | No | |||
| Expiration | - | |||
| Price | - | |||
| Covenants | Negative pledge covenant, Covenant defeasance without tax conseqences, Defeasance without tax consequences, Cross default, Cross acceleration, Consolidation or merger, Sale lease back, Sale of assets, Fixed charge coverage | |||
| Source: S&P Capital IQ. | ||||
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