IB Equity Research

October 9, 2013

ROWAN COMPANIES PLC Thesis Overview

Rowan Companies (RDC) is an attractive asset story delivered on a platform of smart, conservative capital allocation. The investment grade offshore driller is in the midst of a transformative fleet exercise to enter the ultra deepwater (UDW) drillship market in a move that will meaningfully elevate its earnings profile. The capex program is no secret since being announced in 2011, but we believe the sellside is more focused on the immediate earnings profile and the buyside on more topical special situations like Awilco. The visibility and viability of the global fleet becomes more difficult after 2015 and it is likely that the Street is also considering this factor in valuing Rowans pro forma asset base. However, we believe the NAV implication is too punitive for a Company with highly defensible regions like the North Sea and a credible sequence of operational efficiency improvements that have meaningfully improved uptime on existing fleet. Capital allocation is the name of the game and we are comfo rtable with managements history of conservative stewardship. We believe that the contracted backlog offers a defensible moat that will begin to re-rate over the next 1-2 years as the Company takes delivery of its new contracted drillships. We are targeting a base case of $54/share (+50% to current) with limited downside as the Company already trades at tangible book value with $1BN of cash on its books and an investment grade credit rating. At its 3-year low, the equity was still worth $29/share (-19% to current).

Stock Rating Catalyst Category Price Target Price (10/9/13): $35.96 Upside/(Downside): 50% Ticker: RDC Exchange: NYSE Industry: Energy Trading Stats ($USD millions) Market Cap: $4,467 Enterprise Value: $5,699 Price / Book: 0.9x Dividend Yield: 0% Price / 2013E EPS: 17.1x Price / 2014E EPS: 8.7x EV / 2013E EBITDA: 9.1x EV / 2014E EBITDA: 4.7x
Source: Company filings, Wall Street Consensus

BUY Value $54.00

Price Performance 52 Week range: $30.05 - $38.65 Analyst Details IB Username: Stilian Morrison Employer: Independent Analyst Job Title: Analyst Analyst Disclosure RDC Position Held: Yes

IB Equity Research
October 9, 2013

Company Overview
Rowan Companies is a major provider of offshore oil and gas contract drilling services internationally and provides its services utilizing a fleet of 31 self-elevating mobile offshore jack-up drilling units. The Companys primary focus is on high specification and premium jack-up rigs, which its customers use for exploratory and development drilling and, in certain areas, well workover operations. Additionally, the Company has four ultra-deepwater drillships under construction, the first of which is scheduled for delivery in December 2013. The Company conducts offshore drilling operations in various markets throughout the world including the U.K. and Norwegian sectors of the North Sea, Middle East, Southeast Asia, the United States Gulf of Mexico (US GOM), Trinidad and Egypt, among others. As of February 21, 2013, its fleet of jack-ups included 6 in the North Sea, 11 in the Middle East, 7 in the United States Gulf of Mexico, 3 in Malaysia, 2 in Trinidad, 1 in Egypt, and 1 in Indonesia.

Recent Trading Levels

Share Price: 52 Week High 52 Week Low Diluted Shares Outstanding: Market Cap Long-term Debt Underfunded Pension Cash Total Enterprise Value: $ $ $ 35.96 38.30 30.48 124.212

Historical 3-Year Trading

$49 9.0 8.0 7.0

$46
$43 $40 $37 $34

$ 4,466.7 2,000.0 238.0 (1,005.9) $ 5,698.8

EBITDA-Mcapex $ EV Yield $ 230 4.0% $ 382 6.7% $ 807 14.2%

6.0 5.0

4.0
3.0 2.0

$31 $28 10/7/10

1.0 4/7/11 10/7/11 4/7/12 10/7/12 4/7/13 10/7/13

2013E 2014P 2015P

Market Overview
Offshore Drilling Market
E&P spending (both on- and offshore) is invariably tied to prevailing price trends for crude oil and to a lesser extent (especially for offshore) natural gas. The correlation is generally positive, but stickier to the upside. There generally has not been much lag effect either.

IB Equity Research
October 9, 2013

WTI Crude Oil Price vs. Global E&P Spending

$120 $100 $80 (48%) (15%) $800 $700

$600

$60 $40 $20 $-

$400 $300 $200 $100 $-

WTI Crude

Global E&P spend

Offshore drillers compete on price, equipment quality and capability. The determination of competitive niches typically starts with the capability as it relates to water and drill depth as well as a rigs adaptability to particular weather conditions. The North Sea, for instance, is a drill market where mainly high-spec jack-up rigs, capable of absorbing punishing waves from inclement weather, operate. Younger fleet is typically of a higher quality and offers the added engineering redundancy that operators seek from contracted managers in a post-Macondo world. Competing on price will then depend on the contract tenor and the efficiency of the given rig crew as it relates to operational uptime and personnel costs (insurance and other expenses are mostly fixed and relatively di minimus). Capital allocation and intensity are the names of the game here. Todays rigs are generally split between drillships, semi-submersibles, and jack-ups. Drillships are completely independent (i.e. they dont need to be towed to site) and most regularly drill at ultra deepwater (UDW) depths in excess of 7,500 feet. UDW un its total 119 today (including a few semisubmersibles). Together with 176 midwater and deepwater semisubmersibles, they comprise the broader rig category of floaters. Unlike floaters, jack-ups (so named because they can be raised above the ocean surface on their three legs) represent a single equipment category totaling 396 active units, but which can also be bifurcated by their capability for drill depth (above and below 300-350 feet) and environmental tolerance. At todays projected day-rates, these bifurcations impact the payback economics that capital allocators must consider. UDW drillships and High-Spec Jack-ups offer superior economics with estimated EBITDA payback multiples of 5.5x-6.5x the implied values (Source: Pareto Securities; Rig Quarterly; August 22, 2013). The UDW market has operated at or near full capacity for some time now, and utilization is expected to remain robust in the high 90s through 2015-2016 as most newbuilds will enter the market in 2016 and beyond while near-term backlog is already largely contracted. Most of todays newer jack-ups also enjoy 90%+ utilization rates, but there is an observable preference for high-spec rigs that is manifesting out of the need to manage more challenging wellbores. In addition, many of the newbuilds are high-spec rigs that are virtually all contracted to meet open market demand and in turn r eplace an aging fleet. Among todays active jackups, ~55% of the global fleet is more than 30 years old.

($ in billions)

$500

($/bbl)

IB Equity Research
October 9, 2013
Floater Utilization by Water Depth

Source: RDC Investor Presentation (Aug 2013)

Jack-Up Utilization by Rig Class

Source: RDC Investor Presentation (Aug 2013)

Rowan: Leading Quality Fleet

Once a rig operator has stabilized into a contracted, sustainable book, it can become relatively uninteresting unless it revises its dividend or buyback policy as cash builds. Rowan has, for some time now, fallen into that bucket. The shares had a brief honeymoon in the $40s in the spring of 2011 after the company sold its capital intensive manufacturing business to Joy Global (JOY) amid talks of a potential buyout and the viability of its unencumbered jack-up fleet. When nothing happened, the shares dipped into the $30s and have been trading more or less sideways in that range since. However, the Company is now approaching an inflection point: the 2014-15 introduction of four modern UDW drillships to the fleet, with all but one already contracted at lucrative $600k+ day-rates. The incremental earnings impact from the UDW fleet is palpable and transformative. Rowan spent the last two years clawing back the destructive effects of the Great Recession and Macondo, first by shifting mix away from the ravaged Gulf of Mexico (GoM) and then by growing into the popular SE Asia market. Now, with new drillships in place, it should roughly double its EBITDA in 2 years. Meanwhile, the existing jack-ups provide ample transitional support with a core of high-spec rigs deployed in the highly defensible North Sea. I estimate that UDW drillships and North Sea jack-ups will together account for roughly 65% of the 2015 pre-corporate EBITDA.

IB Equity Research
October 9, 2013
2007-2013E RDC EBITDA Bridge
$1,200

$1,000

$800

$600

$400

$200

$-

2013E-2018P RDC EBITDA Bridge

$1,600 $1,400 $1,200 $1,000 $800
$600

$400 $200 $-

Management is now contemplating the option to extend the window for committing to a fifth drillship that would likely cost around $750MM (if exercised) and require additional financing beyond the current debt stack. Yields on the existing debt are attractive at 4.5% such that funding the commitment for this I-grade credit should not be a problem if undertaken. My sense from conversations with the Company is that this decision will not be seriously considered until the fourth drillship is first contracted. Furthermore, the decision itself is not viewed as mutually exclusive of an option to reinstate the Companys dividend, which last ran to the tune of $0.60/share (1.7% yield today) in 2008 and would cost just over $70MM.

IB Equity Research
October 9, 2013

Valuation
Overview
We believe it is most appropriate to value the Company by the pro forma asset quality that represents the source of the earnings transformation and market bifurcations in rig classes. Based on the comps (see appendix), the implied market values assigned to the UDW fleet of various drillers ranges from $650$860MM, with pure play drillers at the low end due to their credit-specific issues of stress (e.g. Ocean Rig). We know that Rowan is spending $750MM per vessel with 75% of that fleet already contracted and worth roughly $400MM per year in guaranteed EBITDA for the 3-year terms (barring a major disruption that leads to downtime or repairs). Yet, the market implied value per drillship is currently $638k, less than the levels of highly levered drillers like ORIG. The story is the same for the core high-spec fleet: a deep NAV discount on the market that is inconsistent with the fleet quality. On a forward multiples basis, the upside is less meaningful, but still substantial. We believe this is indicative of the relatively uncertain earnings environment past 2015 during which most UDW and jack-up newbuilds in the pipeline are estimated to come to market. A lot of this backlog remains uncommitted and subject to deferral/dismissal and there is a cycle of replacement stock that has to be worked through for aged rigs. Nevertheless, we ascribe meaningful weight to the multiples used. The DCF is largely an imprecise black box due to the timing of Rowans capital cycle, but we nonetheless ascribe some weighting to determine our target estimate of $54/share.

Net Asset Value

Unit $MM Count UDW $ 650 4 HE J/u 490 7 HS J/u 225 11 Prem. J/u 25 9 Std. J/u 20 3 Implied TEV 34 Cash Long-term Debt Underfunded Pension Implied Equity Diluted Shares O/s Implied Price/Share Total $ 2,600 3,430 2,475 225 60 $ 8,790 1,006 (2,000) (238) $ 7,558 124.212 $ 60.85

Multiples
EBITDA 1,207 6.0x $ 7,242 1,006 (2,000) (238) $ 6,010 124.212 $ Net Inc $ 514 12.0x

Net A

2015E Metric Multiple Implied TEV Cash Long-term Debt Underfunded Pension Implied Equity Diluted Shares O/s

$ 6,173 124.212

Implied Price/Share

48.39 $ 49.70

IB Equity Research
October 9, 2013

Base Case Annual Financial Projections

2008 WTI Oil ($/bbl) Natural gas ($/Mcf) Utilization Industry North Sea Middle East GOM SE Asia Global RDC North Sea Middle East GOM SE Asia Other Total Excl. cold-stacked Avg. day rate ($ '000s) North Sea Middle East GOM SE Asia Other Total offshore Day-rate revenue Other revenue Total Revenue Backlog estimate Gross profit % margin SG&A EBITDA % margin Maintenance capex EBITDA-Maint. Capex 2009 2010 2011 2012 LTM Jun-13 2013 2014 2015 2016 2017 2018

$ 99.67 $ 61.95 $ 79.48 $ 94.83 $ 94.05 $ 92.14 $ 99.67 $ 98.00 $ 90.54 $ 86.08 $ 83.72 $ 82.35 $ 8.90 $ 4.16 $ 4.38 $ 4.04 $ 2.75 $ 3.45 $ 3.68 $ 3.94 $ 4.14 $ 4.27 $ 4.38 $ 4.51

87% 72% 42% n/a

93% 82% 56% n/a

95% 85% 58% 86% 86%

91% 94% 97% 98% 95%

97% 74% 64% 83% 73%

94% 61% 68% 92% 72%

94% 53% 71% 59% 66% 73%

94% 75% 59% 79% 94% 77% 85%

93% 79% 58% 85% 94% 79% 87%

84% 82% 65% 88% 96% 80% 87%

86% 79% 63% 89% 80% 78% 84%

85% 79% 70% 85% 90% 80% 85%

89% 81% 71% 90% 89% 82% 87%

88% 82% 69% 86% 85% 81% 86%

87% 80% 68% 83% 85% 79% 84%

$ $ $ $ $ $

245 155 130 301 163

$ $ $ $ $ $

243 153 146 258 175

$ $ $ $ $ $

227 141 134 205 162

$ $ $ $ $ $

209 129 117 122 128 142 928 11 939 718 431 45.9%

$ $ $ $ $ $

237 133 121 137 137 156

$ $ $ $ $ $

253 133 130 154 154 165

$ $ $ $ $ $

269 136 139 160 169 171

$ $ $ $ $ $

302 142 169 154 277 200

$ $ $ $ $ $

314 149 284 157 362 247

$ $ $ $ $ $

315 153 284 161 370 250

$ $ $ $ $ $

319 156 276 164 353 247

$ $ $ $ $ $

323 159 279 167 359 251

1,209 2 $ 1,211

1,029 14 $ 1,043

1,000 18 $ 1,018 $

1,356 36 $ 1,393 935 640 46.0%

1,474 37 $ 1,511

1,530 35 $ 1,565

1,767 37 $ 1,803

2,461 37 $ 2,498

2,550 37 $ 2,587

2,466 37 $ 2,502

2,466 37 $ 2,503

731 60.4%

639 61.2%

601 59.0%

704 46.6%

754 48.2%

910 50.4%

1,338 53.6% 130 $ 1,207 48.3%

1,369 52.9% 133 $ 1,236 47.8%

1,231 49.2% 136 $ 1,096 43.8%

1,172 46.8% 138 $ 1,034 41.3% (400) 634

62 66 79 88 100 114 125 128 669 $ 573 $ 522 $ 343 $ 541 $ 589 $ 629 $ 782 55.2% 54.9% 51.3% 36.5% 38.8% 39.0% 40.2% 43.4% (366) 303 $ (167) 406 $ (89) (296) 433 $ 47 $ (350) 191 $ (333) 257 $ (399) 230 $

(400) 382 $

(400) 807 $

(400) 836 $

(400) 696 $

IB Equity Research
October 9, 2013

Public Equity Comps

Comparable Company Analysis
Impl. value/UDW (1) ($ in USD MM, except share price and EPS) Pure-play UDW ORIG Ocean Rig UDW Inc. PACD Pacific Drilling S.A. SEVDR Sevan Drilling ASA H-S Jack-ups NADL North Atlantic Drilling Limited SDRL SeaDrill Limited Large Cap Floaters ATW Atwood Oceanics, Inc. DO Diamond Offshore Drilling, Inc. ESV Ensco plc OB: FOE Fred Olsen Energy ASA NE Noble Corp. SDRL SeaDrill Limited RIG Transocean Ltd. Small Cap Floaters AWDR Awilco Drilling Plc NADL North Atlantic Drilling Limited NOF Northern Offshore Ltd SONG Songa Offshore SE VTG Vantage Drilling Company Other Jack-ups PROS Prospector Offshore Drilling S.A. HERO Hercules Offshore, Inc. Median Pure-play UDW High-Spec Jack-ups Large Cap Floaters Small Cap Floaters RDC Rowan Companies plc P/B 0.8x $ 1.0x $ 0.7x $ 5.7x $ 3.5x $ 1.7x 1.9x 1.4x 2.4x 1.2x 3.5x 1.3x $ $ $ $ $ $ $ 2013E 651 $ 717 $ 526 $ 772 $ 944 $ 765 652 650 771 758 944 576 $ $ $ $ $ $ $ 2015E 538 625 487 644 826 638 535 528 658 620 826 483 n/a 644 n/a n/a 709 n/a n/a UDW 100% 100% 100% 60% 73% 57% 53% 62% 52% 48% 73% 69% 60% 78% Fleet Value Mix (2) H-S J/u 31% 24% 17% 2% 17% 20% 24% 7% 31% 9% 22% 100% Floaters 8% 1% 26% 43% 13% 46% 20% 1% 24% 100% 8% 60% 91% Other J/Us 1% 8% 12% 40% 88% TEV / EBITDA 2013E 10.3x 11.3x 14.8x 8.3x 12.1x 8.6x 6.8x 6.9x 6.6x 8.0x 12.1x 6.7x 3.9x 8.3x 4.5x 5.1x 8.7x n/m 7.2x 2015E 4.9x 4.9x 4.1x 5.9x 8.2x 5.4x 4.2x 5.3x 4.8x 5.1x 8.2x 5.1x 3.4x 5.9x 3.2x 3.2x 6.0x 1.3x 3.9x 2013E 34.7x 32.8x n/m 46.7x 15.9x 10.6x 12.9x 8.4x 9.8x 13.3x 15.9x 11.0x 27.8x 46.7x 88.0x 22.4x n/m n/m 37.5x P/E 2015E 6.4x 7.5x 29.7x 35.0x 10.0x 6.7x 7.8x 6.3x 6.8x 6.8x 10.0x 7.2x 23.1x 35.0x 44.0x 22.4x 4.5x 33.3x 6.8x CAGR ('13E-'15E) EBITDA 45% 53% 90% 18% 21% 27% 28% 14% 17% 25% 21% 14% 8% 18% 18% 25% 21% n/a 36% EPS 134% 109% n/a 15% 26% 26% 29% 15% 20% 40% 26% 24% 10% 15% 41% n/a n/a 135%

2.8x 5.7x $ 1.0x 0.2x 1.2x $ 1.6x 1.3x

n/a 772 $ n/a n/a 785 $ n/a n/a

0.8x 4.6x 1.7x 1.2x

$ $ $ $

651 858 758 779

$ $ $ $

538 735 620 677 547

100% 67% 57% 34%

28% 17% 9% 61%

5% 24% 60%

6%

11.3x 10.2x 6.9x 5.1x 9.1x

4.9x 7.1x 5.1x 3.4x 4.7x

33.7x 31.3x 11.0x 37.2x 17.1x

7.5x 22.5x 6.8x 23.1x 8.7x

53% 20% 21% 18% 39%

121% 21% 26% 13% 40%

0.9x $

638 $

(1) Source: Rig Quarterly ; Pareto Securites (2) Includes newbuilds in the pipeline. Other rigs are excluded as they are either zero or a di minimus part of mix for all drillers Note: Fred Olsen financials translated at USD/NOK rate of 6.11

Risk Factors
Oversupply
The visibility for utilization begins to blur somewhat once one looks past 2016 to a host of newbuild rigs that remain uncontracted in some cases. Contract terms have come down from 5 to 3 years and it seems prudent to expect that day-rates will begin to decline among UDW and premium jack-ups. Rowan does have the advantage of playing in defensible regions like North Sea and recent steps taken to reduce operating downtime provide a greater cushion against potential declines in utilization and day-rates.

Commodity
Crude is back to its annual 2008 highs and there is no question that E&P spending is experiencing resultant euphoria. There is, however, some historical precedent for oil and gas spending to show resilience to macroeconomic pressures as evidenced by a 15% decline in the face of a 48% decline in crude during 2009.

Geopolitical
Rowans leading customer is Saudi Aramco (29% of revenue) and the Company has a heavy Middle Eastern presence in some potentially volatile areas. In the event of disruption, some rigs may be mobilized to safer regions with open demand and all units in the fleet are adequately insured for loss or damage with a $25MM deductible.

Operational
Rowans jack-up fleet is the second youngest in the industry (behind Seadrill) and its new drillships are equipped with the latest in redundancy engineering (two seven-ram blowout preventers) to mitigate the risk of a Macondo-like incident.

IB Equity Research
October 9, 2013

Conclusion
Rowan is priced at a discount to the inflection point that it currently faces in asset and earnings quality. Its conservative investment grade capital structure supports execution of a transformative fleet capex program that will bring the Company into the lucrative UDW drillship market. There are no hard-hitting catalysts beyond the discernible ship deployments and the market has stood pat as a result. However, the focus on earnings has obscured the quality of the pro forma asset base. Other competitors are being credited for their more aggressive budgets, but we prefer our drillers to be conservative in their capital budgeting, particularly with todays inverted oil futures curve. We prefer to get in here early rather than be late to the party.

IB Equity Research
October 9, 2013

Appendix: DCF
DCF Valuation
Oct-13 10yr Tsry Beta ERP WACC Perpetuity growth rate Terminal multiple LTM EBITDA EBIT*(1-tax) Depreciation Stock comp Capex NWC/Other UFCF Discount Factor Sum PV UFCF $ 15 Perpet Terminal Rate Multiple $ 8,226 $ 8,272 8.0x (0.3%) $ 6,079 $ 6,113 2.7% 0.75 5.8% 6.0% (0.3%) 8.0x $ $ 629 $ 782 $ 1,207 $ 1,236 $ 1,096 $ 1,034 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

137 $ 349 $ 609 $ 631 $ 525 $ 479 133 320 400 400 400 400 19 37 37 37 37 37 (931) (1,521) (850) (400) (400) (400) 32 (65) (126) (17) 16 (0) $ (611) $ (880) $ 71 $ 652 $ 578 $ 516 0.9869 0.9315 0.8791 0.8296 0.7830 0.7390

Average Terminal Value Impl. terminal multiple/perpet rate PV Terminal Value Implied TEV Cash Long-term Debt Underfunded Pension Implied Equity Diluted Shares Outstanding Implied Price/Share $ $ 6,096

6,111 1,006 (2,000) (238) $ 4,879 124.212 $ 39.28