I have commented on the value available at Rowan Companies PLC (NYSE:RDC) before. The company currently trades slightly below book and the delivery of new drillships over the next year or so should significantly boost the company’s bottom line.


However, it could be the case that despite Rowan Companies PLC (NYSE:RDC)’s discount and very strong balance sheet, the company is not living up to its full potential.

Rowan has the highest current ratio amongst its peers

For a start, Rowan Companies PLC (NYSE:RDC) has the highest current ratio amongst its peers, the company has a current ratio of 6.2 compared to the industry average of 1.5 – 2. The company also has one of the lowest debt to equity measures in the sector. Far from being a sign of fiscal prudence and stability, I believe this reluctance to spend is actually holding the company back.

Seadrill Ltd (NYSE:SDRL) is doing the opposite of Rowan Companies PLC (NYSE:RDC). Seadrill is spending heavily, chucking out the largest dividend in the sector and borrowing billions every quarter. However, in comparison it seems as if Seadrill is the better company.

For a start, while Seadrill is unable to cover its dividend and has had to borrow on average $2 billion a quarter for the last four quarters to finance both its CAPEX spending and dividend payments, the company’s debt to asset ratio has remained within a 3% range over the past two years and is expected to stay that way for the next three. Moreover, interest costs are only 20% of EBIT so the company can easily afford its debt.

Rowan Companies’s slow growth becomes even more apparent

What’s more, Seadrill is actually achieving a better return-on-equity than its smaller peers. Seadrill Ltd (NYSE:SDRL)’s 5-yr return-on-equity has been 18.2% compared to Rowan’s 11.3%. Furthermore, over the same period it would appear that Seadrill’s earnings and sales have grown much faster that those of Rowan. Seadrill Ltd (NYSE:SDRL)’s five year sales growth is 24% and EPS growth is 14.5% compared to Rowan’s EPS growth of -14.5% and sales growth of 4%. Actually, on a wider scale Rowan Companies PLC (NYSE:RDC)’s slow growth becomes even more apparent. The average 5-yr EPS growth rate for the whole oil & gas drill sector has been around 5%, meanwhile, sales have expanded 10% on average.

So while it is not obvious that a lack of spending is holding back Rowan’s growth, there is certainly evidence to support the fact. Moreover, Rowan has not offered a dividend to investors since 2008, which means that long-term stock holders would be sitting on a five-year total return of -4% and a two year total return of -10%.

Rowan looks like it is being way too conservative

With a net debt to asset ratio of only 13% compared to Seadrill Ltd (NYSE:SDRL)’s ratio of 52%, Rowan Companies PLC (NYSE:RDC) looks like it is being way too conservative. The company has £1 billion of cash on its balance sheet, way more than is needed and could easily be used to boost investor returns, either through a buyback, dividend or even acquisitions. So, while I would usually be supportive of a company that is saving to bolster its balance sheet, it would appear that Rowan is saving too much, holding back growth and not fulfilling its full potential.