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Will Rowan’s Cost Control Measures Prove Fruitful in 2016?

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Rowan pursues cost-cutting measures

Rowan Companies’ (RDC) drilling expense-to-revenue ratio fell drastically from 52% in 3Q14 to 44% in 3Q15. The ratio is 49% lower than in the previous quarter.

To withstand the current industry downturn, offshore drilling companies (OIH) (XLE) have no choice but to reduce their costs as much as possible. Rowan Companies (RDC) and its peers like Diamond Offshore Drilling (DO), Atwood Oceanics (ATW), Seadrill (SDRL), Ocean Rig (ORIG), Transocean (RIG), and Noble (NE) have announced cost reduction plans to maintain profit margins in this difficult scenario.

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3Q15 drilling expenses

  • As we can see in the above chart, Rowan’s drilling expenses, excluding reimbursable costs, showed a 2% improvement from $240 million in the second quarter to $235 million in 3Q15.
  • These expenses were far less than the company’s guidance of $265 million to $270 million.
  • The reduction in costs was despite the increase in costs of approximately $10 million related to the drillship Rowan Relentless, which started its operations in June 2015. The ongoing cost control measures resulted in expense reduction.

Drilling expense guidance

  • The company expects its drilling expense to be higher from the third quarter in the range $245 million to $250 million. The higher expenses are expected due to repair and maintenance activities.
  • With this, the company estimated its full-year 2015 drilling expenses to be $965 million to $970 million, $35 million to $40 million lower than the previous guidance it gave last November.
  • The company expects its cost reduction plans to continue in 2016 and predicts 2016 drilling costs to be in the range $930 million to $950 million, which is 2% to 4% lower than 2015 estimates.

3Q general and administrative expenses and guidance

  • The company’s general and administrative expenses fell to $29 million in 3Q15 from $31 million in the second quarter.
  • The costs were also slightly lower than the company’s guidance of $31 million. This was due to lower value of equity compensation and impact of the company’s cost control measures.
  • In the fourth quarter, the company expects these costs to increase slightly to $30 million. With this, the general and administrative expenses for the full year 2015 are estimated to be $118 million, $17 million lower than the previous guidance.
  • The company expects the 2016 administrative expenses to fall to $105 million to $1,150 million, which is a 3% to 11% decline from 2015 levels.
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