Monday, Credit Suisse downgraded Rowan Companies Inc. (RDC) shares to Underperform from Neutral, while increasing its price target to $20 from $16.
Analyst Jayaram downgraded the stock primarily on valuation as he introduce a normalized earnings framework for the offshore drillers. The analyst's downgrade also reflects his preference for oilier rather than gassier equities such as RDC and potential jackup rollover risk in Saudi Arabia.
While estimates are unchanged, the analyst did increase his 12-month target price to $20 from $16 as he lowered the discount rates used in his driller discounted cash flow models back to 10% from 12% previously given the general thaw in credit markets.
In a subdued pricing environment, normalized earnings matter. Given significant newbuild jackup rig additions, secular declines on the U.S. GOM shelf, and the anticipated conclusion of several LNG 'mega' projects between 2009 and 2011, the analyst believes pricing power notwithstanding higher oil prices in an economic recovery will be limited.
In this subdued growth environment, the analyst believes the market will increasingly focus on the normalized rather than full-cycle earnings power of the drillers and reward companies poised to generate superior free cash flow through the cycle.
Introducing normalized earnings framework that incorporates free cash flow generation. The analyst's framework not only considers the normalized earnings power of the drillers on a rig-by-rig basis for 2012, but adjusts valuations based on anticipated free cash flow generation between 2009 and 2011, which he views as a superior approach for stock selection under the muted dayrate recovery scenario that appears most likely.
RDC is the most expensive stock on our normalized earnings framework. On the analyst's normalized earnings estimates, Atwood Oceanics Inc. (ATW) and Pride International Inc. (PDE) screen as the most attractively valued stocks, but a key limitation of this analysis is the failure to measure balance sheet changes.
The analyst said that after adjusting for anticipated free cash flow generation from 2009 to 2011, RDC screens as the most expensive stock in the group at 17.0 times normalized EPS versus 9.0 times for the peers. Transocean Ltd. (RIG) and Noble Corp. (NE) are the two most attractively valued equities based on the analyst's analysis.
Currently, RDC is down $1.55 or 6.68% and trading at $21.64.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.