Atwood Oceanics is a leading offshore drilling company engaged in the drilling and completion of exploration and development wells for the global oil and gas industry. The company currently owns 12 mobile offshore drilling units and is constructing three ultra-deepwater drillships. This article discusses the revenue upside triggers and the reasons to remain bullish on the stock.
Robust Contract Backlog
For the second quarter of 2014, Atwood Oceanics reported revenue of $273 million and an EBITDA of $112 million. A strong contract backlog ensures the stable revenue inflow will continue for the company. In the next section, I will discuss how revenue growth is likely to come.
As of March 2014, Atwood Oceanics had a contract backlog of $3.4 billion, which represents a 42% increase in order backlog of $2.4 billion as of March 2013. The contract drilling revenue backlog ensures that Atwood Oceanics has a revenue visibility and firm cash inflows.
As of March 2014, the company had a backlog of $606 million for the remainder of 2014 and a backlog of $1,296 million for 2015. The current contract backlog ensures that the company’s rigs are 92% utilized for the remainder of 2014 and 73% utilized for 2015. As we move towards 2015, the utilization will surge over 90% for 2015 as well. In other words, Atwood Oceanics has a secure cash flow stream for the next two years.
New Rigs To Boost Growth
For the first six months of Fiscal Year 2014, Atwood Oceanics reported revenue growth of 12% to $558 million compared to $498 million for the first six months of Fiscal Year 2013. The revenue growth has been moderate for the first half of the year. However, there is likely to be a revenue bump-up in the second half of Fiscal Year 2014 and for Fiscal Year 2015.
Atwood Achiever, an ultra-deepwater rig is expected to be delivered in August 2014. The rig is likely to command a day rate similar to the company’s existing fleet, which is in the range of $470,000 per day to $595,000 per day. Incremental revenue growth will be witnessed as the fleet becomes operational.
Further, Atwood Admiral and Atwood Archer are expected to be delivered in March 2015 and December 2015 respectively. This will provide the revenue momentum for Fiscal Year 2015 and 2016. Atwood Oceanics therefore has a strong growth pipeline and this will ensure that health growth and robust cash flows keep flowing.
Along with a strong growth momentum, Atwood Oceanics has also maintained strong fundamentals. As of March 2014, the company had $1.5 billion of debt, but a low leverage of 3.1. Further, the EBITDA interest coverage was more than comfortable at 12.4. This implies that Atwood Oceanics has a strong financial flexibility and can leverage further to fund the new rigs under construction.
A healthy cash position of $59.6 million and a strong operating cash flow of $168 million for the first six months of 2014 also add to the fundamental positives. While the company’s free cash flow still remains negative, it is not a concern as Atwood Oceanics is still in a growth stage. A high capital expenditure will translate directly into high revenue growth and strong operating cash flows in the foreseeable future.
Valuation And Conclusion
Given the expected growth over the next two years, Atwood Oceanics looks attractive with a medium-term investment horizon. At a current market price of $52.15, the stock trades at a trailing twelve month EV/EBITDA valuation of 8.8 and a forward (5-year) PEG of 0.54. The PEG metric does suggest undervaluation with respect to the future growth potential. Further, Ocean Rig (ORIG) currently trades at an EV/EBITDA valuation of 10.2 and Pacific Drilling is trading at an EV/EBITDA valuation of 11.7. Therefore, even on a relative basis, Atwood Oceanics looks undervalued and has upside potential.