During the third quarter, we sold our investment in Atwood (ATW, Financial) and reinvested the proceeds in PTEN. There are many things to like about Atwood, including their young fleet of high-spec rigs, their significant revenue backlog, their industry leading margins and revenue efficiency, their track record of safe operations, and their seasoned board of directors. The problem with Atwood is they have debt maturing in the next three years. While we imagine the cycle may have turned by then, we always look for a margin of safety and have chosen to reinvest this capital into other energy names with more favorable balance sheets is beyond reproach. Unlike land drilling, if a rig runs out of work it costs a lot of money to store (particularly floating rigs). We do not know if the cycle will last beyond the time when the bulk of Atwood’s revenue backlog runs out. The recent credit facility amendment greatly reduced Atwood’s flexibility and puts shareholders in a position where if they guess wrong about when the cycle turns they may lose their entire investment. We were not willing to underwrite that.
By selling the shares of Atwood and reinvesting in Patterson we do give up some revenue backlog, but we pick up another well run dividend paying company at a discount to tangible book value with a much better balance sheet and greater liquidity. Crucially, it costs very little money to store Patterson’s land drilling rigs or pressure pumping equipment in a yard if either are idled. We have confidence that by selling Atwood and investing in Patterson we have reduced our downside risk. Recall that we executed a similar swap in the first quarter of this year, when we replaced our Ensco holding with Helmerich & Payne for the very same reasons: similar upside but significantly greater downside protection.
From FPA Capital Fund (Trades, Portfolio)'s third quarter 2015 letter to shareholders.
