Atwood Oceanics (ATW, Financial), which is in the business of offshore drilling, has delivered strong results for the first nine months of FY15. However, from a peak of $35.35 in May 2015, the company’s stock has slumped to current levels of $19.4. This article discusses the reasons for this decline and my current view on the stock.
Before talking about the steep decline in the company’s stock, I would like to briefly discuss the company’s results for the first nine months of FY15. For nine months ended June 2015, Atwood Oceanics reported revenue of $1.0 billion as compared to revenue of $850 million for the nine months ended June 2014. For the same period, the company reported an operating cash flow of $484 million as compared to $339 million. Therefore, the results have been strong and this has been backed by continuing contracts for the company’s modern rig fleet.
Amid these positives, Atwood Oceanics has slumped, and I believe that there are two key factors for decline in company’s stock. First, renewed decline in oil prices has resulted in weak sentiments for offshore drillers, and Atwood Oceanics has declined in line with a broad industry correction. Second, Atwood Oceanics has several rig contracts that are expiring in 2016, and I believe that market is discounting this concern. I will further elaborate on the second factor to back my point that Atwood Oceanics stock might remain depressed even if 4Q15 results remain strong.
Among ultra-deepwater submersibles, Atwood Osprey, which currently commands a day rate of $455,000, is scheduled to go off-contract in May 2016. Further, Atwood Condor, which currently commands a day rate of $555,000, is scheduled to go off-contract in November 2016. I must add here that the delivery date for Atwood Admiral, which was scheduled to be delivered in September 2015, can potentially be pushed back to September 2016.
The key concern is that oil prices are depressed and oil supply from Iran would imply that oil remains depressed in the foreseeable future. Therefore, there is minimal chance of revival in the offshore drilling industry in 2016. Considering this point, I believe that re-contracting of rigs and scouting for contract for the new rig will be a big challenge for Atwood Oceanics. If the rigs are warm stacked or cold stacked, the company’s cash flow outlook will change significant for FY16 and FY17. This is the single biggest factor for decline in Atwood Oceanics stock in the recent past.
I must mention here that Gurus have been proactive. Arnold Van Den Berg (Trades, Portfolio) of Century Management has reduced stake in Atwood Oceanics for the quarter ended June 30, 2015 as well as the prior quarter. It therefore makes sense to track real time activity of Gurus and Guru Focus Real Time Picks is one good source.
Coming back to the fleet discussion, among deepwater submersibles, Atwood Falcon and Atwood Eagle and are also scheduled to go off-contract in March 2016 and September 2016 respectively. In addition, two jack-ups are going off-contract in the last quarter of 2015 and the remaining three jack-ups are going off-contract on or before September 2016.
Clearly, there is a big concern for Atwood Oceanics in 2016 and I don’t see many contract awards in the coming months. The company’s revenue and cash flow are therefore certain to take a hit in FY16 and FY17.
As a positive point, I must add that the company’s balance sheet health is strong and with a fully funded capital expenditure program, there are no financing concerns for Atwood Oceanics. However, the company’s dividend of $1 per share can potentially be under threat if offshore industry conditions remain depressed through 2016 resulting in low or delayed contract renewals for the company’s rigs.
I believe that Seadrill (SDRL, Financial) will suffer from the same problem as the company has several rigs going off-contract in 2016 and the company also has several new rigs for delivery. However, from a balance sheet perspective, Atwood Oceanics is better placed as compared to Seadrill and I am doing this comparison to suggest that investors looking for value buying in 2015 o 2016 might generate relatively attractive returns in Atwood Oceanics.
However, for the next 3-6 months, I would prefer to remain in the sidelines and wait to see if Atwood Oceanics wins contracts during this period for rigs going off-contract in 2016. If the order backlog for 2016 improves, there will be case for gradual investing in Atwood Oceanics. At this point of time, the outlook for the entire energy sector remains depressed amidst several events playing out globally.
