The year has been volatile for Atwood Oceanics (ATW, Financial) in terms of stock price movement with the stock bottoming out at $5.32 on Feb. 2 and then surging by 157% to year-to-date highs of $13.66.
The stock subsequently corrected by 33% to levels of $9.19.
Several companies have already talked about the outlook for the offshore drilling industry for 2017. Just as an example, Seadrill expects the offshore industry's challenge to continue through 2017. The offshore industry is unlikely to witness any meaningful recovery in the next 12 to 15 months. It would be smarter to remain on the sidelines even after the recent correction in the stock.
Coming to company-specific factors, Atwood Oceanics reported revenue of $832 million for the year to date as compared to revenue of $1.032 billion a year ago. Further, the EBITDA for the year to date was $363 million as compared to year-to-date 2015 EBITDA of $474 million.
Even with the decline in revenue and EBITDA, Atwood Oceanics still posted decent results in challenging market conditions. This can be solely attributed to the front end-loaded order backlog of the company. For fiscal year 2016, the company’s contract coverage has been well over 60%.
However, the scenario is completely different for fiscal year 2017 with the company’s contract coverage below 30%. The key point to note here is that industry conditions will remain challenging through 2017, and I don’t see strong improvement in contract coverage. Further, even if the rigs are recontracted, the day rates will be meaningfully lower, and this will impact the company’s EBITDA margin and operating cash flow. The outlook for 2017 is therefore sluggish; as rigs go off contract in the next 12 to 15 months, the stock will react negatively.
Amid these concerns, few credit positives make me believe that Atwood Oceanics can still survive the crisis even if market conditions remain challenging through 2017. The first point to note is that the company still had a healthy cash buffer of $199 million as of June; with operating cash flow likely to remain decent through 2016, the cash buffer will remain strong into 2017. Further, Atwood Oceanics has debt of $1.4 billion as compared to debt of $1.7 billion as of Sept. 30, 2015. I expect deleveraging to continue, and asset sale is an option going forward.
From a debt maturity perspective, Atwood Oceanics has no maturity until May 2019, and this is yet another credit positive. This is offset by the point that as EBITDA declines, the EBITDA interest coverage ratio will shrink in the coming quarters. I therefore mentioned potential asset sale for debt reduction as the focus of Atwood Oceanics would be to ensure smooth debt servicing even if contract coverage remains weak through 2017 and potentially into 2018. Debt covenants have been relaxed for the next two years and that provides Atwood Oceanics with some flexibility on the financial front.
Overall, there are concerns that sustain for the industry and Atwood Oceanics is likely to struggle even with a quality fleet. While the stock has corrected by 33% in the recent past, further correction is entirely likely and it would be best to stay on the sidelines until there is more clarity on the extent of EBITDA margin compression in fiscal year 2017 and beyond.
Disclosure: No positions in the stock.
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