Atwood Oceanics (ATW) is an offshore drilling contractor. They have been an industry leader in utilization rates, profit margins, and returns on capital for years, and they have been profitable 19 of the last 20 years. Our thesis for purchasing the stock was that the company had almost completely renewed its fleet over the last few years and signed those rigs to contracts that gave it one of the biggest backlogs in the industry. We are currently modeling in our Base Case that 98/77/36% of the total revenue we expect them to generate in FY2015/16/17 is already under contract. We believed the culture and business practices behind the company’s peer-leading efficiencies would allow them to convert that backlog into substantial profits and initiate a meaningful dividend, which they recently implemented ($1/share per year).
The stock’s negative performance in the fourth quarter is due to a combination of macro and company-specific factors. Macro: Spot prices for Brent Oil fell by nearly 40% during the quarter, as discussed above, and the Philadelphia Oil Service Sector index had a total return of (20.38%). Company-specific: Atwood delayed the delivery of their two uncontracted newbuild drillships by 6 months because they lost out on a customer tender that would have put them to work at decent rates of ~$400k/day. However, even if drillship dayrates fall further to $350k/day the company should still earn $3/share by FY2017 when most of their backlog will have burned off. At the Dec-31 price of $28.37 the stock is trading at less than 10x that figure (and yielding 3.52%), but in the intervening two years the company should earn ~$12 per share, or greater than 40% of the current market cap. The company-specific elements of our thesis are still intact.
From FPA Capital Fund (Trades, Portfolio) Q4 2014 Letter.
