Former CEO Takes On Current Management at Oil-Driller Rowan

"Nothing personal; just business, " C.R. Palmer, the former chairman and CEO of contract oil-driller Rowan Companies, Inc. writes about his successor, Daniel McNease. Nevertheless, he added, the message should be clear: "You're fired!"

Palmer is waging an ugly fight to unseat current management at the company, which also supplies equipment for the drilling, mining and timber industries. On May 19, the oil tycoon, who holds Rowan shares worth roughly $46.0 million, wrote an open letter to shareholders to share his lack of confidence in the company's current leadership. Specifically, Palmer believes that McNease, who took over as chairman and CEO when Palmer retired in May 2003, has managed Rowan's growth poorly. Specifically, he argues that recent offshore-rig purchases have burdened Rowan's balance sheet with an additional $1.5 billion in debt without any clear plan as to how they will make money for the company.

Palmer may be off base in some respects. Figures from Rowan's latest quarterly SEC filing on May 9 suggest that the company's balance sheet is solid. As of March 31, the company's liquidity looked good, with a current ratio and long-term debt/capitalization of 2.65 times and 14 percent, respectively.

The company's operating performance, however, is another matter. In a boom time for oil and gas drillers, Rowan Companies reported earnings for the first-quarter ended March 31 of 84 cents a share on revenue of $485.5 million. Analysts polled by Thomson Reuters expected share-net of 85 cents, on average, on revenue of $517.4 million.

Management blamed the lower than expected operating results on shipment delays, particularly rig relocations and modifications on several of its "jack-ups", which are mobile drilling platforms with retractable legs that rest on the seabed while the rig is in operation. The company's offshore fleet was 91 percent utilized during the first quarter, down sequentially from last quarter due to mobilization and shipyard time incurred in preparation for long-term contracts. Two jack-ups are moving to new assignments (in Saudi Arabia) and one is being prepared for ultra-deepwater activities. In addition to lower than anticipated earnings, other operating metrics support the notion that Palmer may have a legitimate gripe. The trailing twelve-month operating margins and return on assets for Rowan were 34 percent and 12 percent, respectively. This compares with 48 percent, 20 percent and 46 percent, 36 percent, respectively, for industry titans Diamond Offshore Drilling and Transocean.

Palmer, who is 75, may be more focused on how history will judge his legacy, since Rowan is transitioning itself to be a stronger global competitor. When Palmer retired, Rowan was mainly an on-shore mud pump driller, operating principally in Texas, with some shallow-water jack-up operations in the Gulf of Mexico.

McNease is expanding the offshore footprint of Rowan globally. The driller operates approximately 24 Cantilever Jack-up Rigs (anchored in 300-500 feet or water) offshore in the North Sea, West Africa, and the Middle East, equipped to drill to depths of 35,000 feet. The company also has an additional nine offshore rigs, under construction or on order for delivery by 2011, none of which are contracted. Palmer fumes that "the full consequences of the foregoing decisions may require more than five years to become known and could prove fatal to the legacy of Rowan."

But whose legacy are we talking about here -- Palmer's or Rowan Companies'?

According to published reports, there are currently 82 jack-up rigs under construction or on order between now 2008 and 2011. Demand is likely to continue outpacing supply in this market, at least through 2011. As I noted in a previous post, declining yields from mature, onshore energy fields coupled with increasing natural gas and oil prices is driving demand for global drilling activity higher.

There are hints that Palmer might have personal motives for pointing a Trump-like finger at McNease. According to SEC filings, it looks as though Rowan's management has steadily eased Palmer out of his active post-retirement role at the company.

• Upon Palmer's 2003 retirement, Rowan retained him as a consultant capacity for a year and a half, paying him $333,333 in compensation. The consulting fee terminated on April 30, 2004.
• During this time, Palmer remained a company director, receiving an additional $68,000 per year.
• At its July 2004 proxy meeting, the company recognized Palmer's service as chairman emeritus and granted him options worth $758,100.
• Pursuant to his severance contract, the company provided Palmer with office and administrative support, estimated to cost $100,000 annually, with personal access to certain of Rowan's facilities and equipment, including company aircraft. In addition, the company incurred about $1.1 million in combined 2004 and 2005 expenses related to Palmer's participation in pension-restoration plans.
• In April 2006, Palmer resigned from the board of directors. Although the company continued to furnish him with an administrative assistant, the board revised the agreement terms to make Palmer reimburse the company for 60 percent of his assistant's salary. In addition, his use of the company's aircraft was restricted to "if available" status and limited to 20 flight hours a year.
• Records indicate that Rowan employed Palmer's son John Palmer as a regulatory-compliance manager. In 2005, the proxy filing revealed that John earned approximately $135,000 in compensation. There is no record of his employment with the company thereafter.