Uncertainty in the oil industry has seen a sharp decline in the price of Rowan Companies PLC (NYSE:RDC)’s debt maturing August 2019. However, Rowan’s short-term debt (August 2019) still look like a safe bet for bond investors and here is why.
The worries about the rout in the oil market and its implications on Rowan’s cash flow appear to be overdone. It is true that lower oil prices has contributed to significant cut in drilling budgets and withholding of certain offshore projects where Rowan makes it money. However, Rowan is strong its own right.
Strong cash position
As of the end of 3Q2015, Rowan Companies PLC (NYSE:RDC) had total long-term debt of $2.8 billion. However, the company not only had a positive capital balance by the same time, but it also had $290 million of cash balance. In a recent update, the management highlighted the ongoing efforts to strengthen the balance sheet, saying the company retired $98 million of debt before maturing during 4Q. Additionally, the company pulled the plugs on dividends, thus allowing room to strengthen the balance sheet further by limiting cash outflow. Rowan expects withdrawal of dividends to save $50 million annually.
Rowan Companies PLC (NYSE:RDC)’s cash position may have increased to $480 million from $290 million during the last three months of 2015. That improvement in cash balance came despite the company spending about $100 million to pay down debt. Rowan is scheduled to report its 4Q2015 earnings towards the end of this month and that is when its liquidity position will be confirmed.
More signs of strength
With about $450 million in backlog for 2015, improving cash position and balance sheet cushion from $1.5 billion in credit facility through 2019, you don’t see Rowan Companies PLC (NYSE:RDC) as a company hanging precariously because of debt. Rowan recently extended its revolving credit facility to 2021 to further allow it more financial flexibility.