Barron’s Analyst Naureen Mailik Recommended Rowan.

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a. At a time when these stocks are at or hovering near multiyear lows, Rowan sparkles with potential. The company owns and operates what is seen as one of the highest-quality fleet of jack-up rigs in the world. Primarily, Rowan’s jack-ups, named because they have legs that rest on the ocean floor, can drill some of the deepest offshore wells in the world.

b. However, the company’s shares have declined 21% since touching a 52-week high of $47.94 on June 30 and are trading at a mere 7.2 times 2009 earnings estimates.  Drillers typically trade at 10-20x.

c.  Contract renewals for existing rigs and the delivery of nine new jack-ups through 2011 will expand Rowan’s fleet by 40%, in turn driving double-digit earnings growth at the company.

d. The anticipated sale by year end of LeTourneau, a unit of the company which builds rigs, ships and mining equipment and operates a steel mini-mill, would return some hefty cash to shareholders.

e.  solid balance sheet and 14.9% debt-to-capitalization to begin with. “They are going to have a lot of cash — they can buy at least 10% of the stock and probably do a special dividend to shareholders”.

f. Rowan has a competitive advantage in that its jack-up fleet can bore some of the deepest wells into the ocean floor. In fact, of all 12 offshore rigs on the market that can drill 30,000 feet, Rowan has eight, says Henzi. By the end of the year it will add another two.

g. During the Aug. 5 conference call, Rowan Chief Executive Officer Danny McNease said: “We believe the global jack-up market looks strong” as new jack-ups being built on speculation continue to be absorbed in the market without significantly pressuring day rates.

CONCLUSION:

Overall, Rowan’s decision to concentrate on drilling activity in international waters should jack up earnings and create deep pockets for investors.