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Why Moody’s Downgraded Rowan Companies ahead of 2Q17 Results

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Credit rating changes

On July 26, 2017, Moody’s downgraded Rowan Companies’ (RDC) debt one notch lower to B2 from B1 with a negative outlook. B2-rated debt is considered speculative and is subject to high credit risk. According to Moody’s, the downgrade reflects the deteriorating credit metrics through 2018 due to a lower utilization rate and pressured day rates. It also reflects uncertainty towards the recovery of the offshore drilling industry and thus uncertainty surrounding Rowan’s cash flow and credit metrics.

On the same day, Moody’s also downgraded other offshore drillers (IYE) Diamond Offshore (DO) to Ba3 and changed Transocean’s (RIG) outlook to negative.

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Analyst revisions

Some Wall Street analysts revised Rowan Companies’ target price in July. Jefferies cut the target price to $12 and maintained a “hold” rating on RDC. Credit Suisse slashed the target price to $13 from $17. Wells Fargo reduced the target price for RDC to $12 from $19. Wells Fargo also slashed target prices for Ensco (ESV), Atwood Oceanics (ATW), and Noble Corporation (NE).

Consensus recommendations

Thirty-three analysts cover Rowan Companies, according to Reuters. The consensus rating for the stock is 2.8, which means a “hold.” Out of the 33 analysts, eight analysts are bullish. Two of these suggest a “strong buy,” and six suggest a “buy.” Twenty-three analysts are neutral and have a “hold” recommendation for RDC. Two analysts are bearish with “sell” recommendations on the stock.

Target price

The consensus 12-month target price for Rowan Companies is $14.59, which implies a potential upside of 25.6% from the market price of $11.6 on July 28, 2017.

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