Morgan Stanley Upgrades Rowan Cos., Downgrades Seadrill To Equalweight

• While Seadrill Ltd SDRL shares have plunged 76 percent since July 29, shares of Rowan Companies PLC RDC have lost 30 percent.
• Morgan Stanley’s Ole Slorer changed the ratings and price targets for both companies.
• The oil price outlook had weakened, with a prolonged downturn in the offshore rig market, Slorer stated.

Analyst Ole Slorer said that there could be a prolonged downturn in the offshore rig market, with an uptick unlikely until 2018. He wrote, “The deeper and longer oil price downturn has extended the harsh outlook for floater demand, for which we now anticipate a continued decline through 2017.”

Offshore is likely to lag NAm Onshore, even in an OFS recovery. Meanwhile, the primary driver of stock performance in the sector has become the balance sheets.

Seadrill

Slorer downgraded the rating for the company from Overweight to Equal-weight, while reducing the price target from $12.0 to $2.5. He wrote, “Despite already underperforming, SDRL’s elevated debt profile amidst what is shaping up to be a longer downturn will likely trigger balance sheet restructuring.”

While Seadrill has delivered on cost savings initiatives, new-build delivery delays / cancellations, and debt covenant amendments, its elevated debt profile, combined with the more prolonged downturn, leaves the company in a “more vulnerable position than before.”

Despite the latest waivers, Seadrill’s debt covenants may be breached, and it may seek further flexibility on this front, along with possible debt deferral. The company may decide to repurchase debt using proceeds from an equity raise, “but this will likely require attractive terms and participation from its main sponsor,” Slorer wrote.

Rowan Companies

The analyst upgraded the rating for the company from Underweight to Equal-weight, while reducing the price target from $20 to $17. He explained, “RDC has recently underperformed with growing concerns over its 2017 fleet exposure, but we see it as better positioned vs. peers from a balance sheet angle.”

The jack-up market, which Rowan is most levered to, may hold up better versus the floater market, Slorer commented, while adding that the company has no historical or current exposure to Brazil, where “corruption investigations have started spilling over to rig contracts.”

Rowan’s relative balance sheet strength indicates that the company is likely to be among those offshore drillers who survive the downturn and “cross over the other side.” Although Rowan’s Net Debt / EBITDA is likely to exceed reasonable levels, the analyst pointed out that what is more important is that the Net Debt / Fleet Value ratio is likely to be kept in check. The Morgan Stanley report added, “Besides coming out stronger vs. peers on the latter metric, RDC also has an untapped $1.5bn revolver that matures in 2020.”