In the last 6-9 months, there have been very few offshore drillers that I have been bullish on for the near-term as well as the long-term. Atwood Oceanics (ATW, Financial) is one offshore driller that I have recommended in the past and my positive view on the stock is maintained after the company released its 2Q15 results. This article discusses the second quarter results and the key investment positives related to the stock.
For the second quarter of FY15, Atwood Oceanics reported revenue of $350 million as compared to revenue of $273 million for the second quarter of FY14. Further, for 1H15, the revenue was $702 million as compared to $558 million for 1H14. Therefore, Atwood Oceanics has maintained a strong revenue growth trajectory and this has been backed by rig additions in FY14 coupled with long-term contracts for the company’s existing rigs. The long-term contracts (especially for the ultra-deepwater rig) ensure that the company is not impacted by current day rates.
Besides the strong revenue growth, another big positive in the company’s results is the robust operating cash flow. For 1H15, Atwood Oceanics had an operating cash flow of $350 million as compared to an operating cash flow of $168 million in 1H14. As a result of strong operating cash flows, the company has been free cash flow positive for the first six months of 2015. Being FCF positive has also helped the company repay $135 million in long-term debt. Therefore, from a fundamental and cash flow perspective, Atwood Oceanics is on a strong footing and I expect the company’s 2H15 results to remain robust on long-term contracts.
From a growth perspective, Atwood Oceanics had one ultra-deepwater rig that was scheduled for delivery in FY15. However, the company has exercised the option to delay the delivery of the rig to March 2016. While this implies that there will be no further revenue growth on a quarterly basis, contracting of the new rig was a concern that has been postponed to 2016. The company has another ultra-deepwater rig that is scheduled for delivery in June 2016. In my view, if market conditions remain challenging, Atwood Oceanics would delay the delivery of the second rig as well.
From a liquidity perspective, Atwood Oceanics has a cash position of $90 million as of 1Q15 and an undrawn revolving credit facility of $593 million. This provides a total liquidity buffer of nearly $700 million. I am discussing the liquidity as Atwood Oceanics has $800 million in capital expenditure in 2015 and 2016. However, with the current liquidity along with strong operating cash flows in the coming quarters, Atwood Oceanics is fully funded for the capital expenditure program.
In conclusion, Atwood Oceanics has strong contract coverage for 2015, robust cash flow, well managed balance sheet and a fully funded capital expenditure program. This makes the stock attractive for exposure even at current levels with the medium to long-term investment horizon.
