Atwood Oceanics (ATW, Financial) is among the offshore drillers that have corrected significantly in 2014 and look attractive at current levels. This article discusses the reasons for being bullish on Atwood Oceanics for the coming year even as oil prices remain sluggish.
From a high of $53.79, Atwood Oceanics corrected to $26.76 by December 15, 2014. Since then, the stock has moved higher and is currently trading at $30.46. The upside in the stock has been due to two reasons – First, there has been some recovery in oil prices and the stock has moved higher accordingly. Second, Atwood Oceanics was trading at very attractive valuations, making the company a value buy at those levels.
Coming to the valuations, Atwood Oceanics is still trading at an EV/EBITDA of 6.17 as compared to an EV/EBITDA of 7.78 for Seadrill (SDRL, Financial) and an EV/EBITDA of 7.54 for Pacific Drilling (PACD, Financial). I therefore believe that the current upside for Atwood Oceanics will continue into 2015.
The only risk factor is oil prices, and if oil prices plunge below $55 per barrel, Atwood Oceanics can witness renewed correction. However, I believe that oil can trade at $60 to $70 per barrel in 2015. I still advise investors to remain cautious and consider small exposure to the stock.
Coming to the big positive point related to the company’s fleet status, Atwood Oceanics has four operating ultra-deepwater fleet as of December 2014 and all the four fleet are contracted 100% for 2016 and for the large part of 2016 with one UDW going off-contract in November 2016. Therefore, the company’s revenue visibility from UDW rigs is excellent. The company also has one new rig for delivery in September 2015 and another rig for delivery in June 2016. This provides a growth pipeline once these two rigs are contracted.
Among the deep-water semisubmersibles, the company’s contract status is equally good with two of the three rigs contracted through 2015. Atwood Hunter has gone off contract in December 2014, and it remains to be seen when the rig is contracted again.
Overall, the biggest two revenue and EBITDA driving segments of the company have an excellent revenue visibility in 2015 and this will ensure that the company’s operating cash flow in robust in the coming year.
For 2016, the outlook will depend on when oil prices recover. OPEC expects oil prices to recover in the second half of 2015 and if this scenario pans out, Atwood Oceanics will continue to perform well into 2016.
Another important point is that Atwood Oceanics currently offers a dividend of $1 per share and a dividend yield of 3.6% considering the current stock price of $30.46. I believe that the company’s dividend payment will continue through 2015. This is important to mention as Seadrill had to suspend dividends to manage debt in the slowdown. However, with the current contract status, Atwood Oceanics is well positioned to pay dividends, service debt and also continue to grow.
Atwood Oceanics also has a decent long-term issuer rating of BB from S&P, and the company’s senior unsecured debt is rated BB by S&P and Ba3 by Moody’s. I believe that the company’s rating backs my point on the company’s strong financial position and balance sheet position.
In conclusion, Atwood Oceanics has a current order backlog of $2.9 billion and the company has 84% of days contracted for 2015. High contract coverage, management’s view of growing dividends by 10% annually, pipeline of new rigs in 2015 and 2016 and a high ROCE makes Atwood Oceanics an excellent investment option. With an expected contracted after tax cash flow of $751 million for 2015 and $667 million, the stock will continue to reward shareholders and the big correction in 2014 is a long-term investment opportunity.
