When you think of Texas-based oil companies, you probably
don't think of deepwater rigs in faraway places like Malta,
Equatorial Guinea, Australia or Thailand.
Then again,Atwood Oceanics (
) isn't your typical Texas oil company. For one thing, it doesn't
drill on land. For another, only a tiny portion of its revenue,
about 5%, comes from the U.S. Most of its business is centered in
the South Pacific or off the coast of West Africa.
Atwood specializes in the drilling and completion of
exploratory and developmental oil and gas wells. Its fleet of 13
rigs includes semisubmersibles, deepwater drillships and jack-up
rigs. It also has three ultra-deepwater drillships under
The company maintains offices on five continents and boasts a
multinational workforce of 1,200 people. It makes money by
charging day rates to oil companies for using its rigs. Its
biggest clients includeChevron (
),Noble Energy (
) andKosmos Energy (
Heavy demand for oil in many global markets has pushed day
rates to a range of $550,000 to $600,000 a day, well above the
These high rates have led to an expansion of the number of
fleets on the water. Although this means more competition for
Atwood, the company has a number of advantages over most other
drillers, analysts say.
"Among offshore drillers, Atwood is one of the companies that
is better positioned to take advantage of current conditions,"
said Ian Macpherson, an analyst at Simmons & Co.
"They have relatively modern assets, so they are not as
exposed to the threat of obsolescence as other companies," he
said. "And they're small enough that the investments they make
have a material effect on earnings."
Those investments include efforts to expand Atwood's fleet of
deepwater drillships, which can drill in water 12,000 feet
It takes $650 million to build a drillship, and five or six
years to pay one off at current day rates. That's a hefty sum for
Atwood, which had $787 million in revenue last year. But the
company has shown a knack for turning investments into
"They have a pretty good balance of capitalizing and free cash
flow," Macpherson said. "Historically, they also have
better-than-average return on capital and they're pretty reliable
in terms of operating efficiency. Some of the smaller competitors
are a little more extended now and less able to expand their
Of the three deepwater drillships currently under
construction, two are already under contract.
The latest of those deals was announced June 10, when Atwood
was awarded a drilling services contract for the Atwood Achiever
drillship by a subsidiary of Kosmos Energy. The contract is for
an exploration program off the coast of Morocco.
The Achiever is one of the rigs under construction at the
Daewoo Shipbuilding and Marine Engineering shipyard in South
Korea. It is scheduled for delivery in June 2014.
The new contract specifies a base operating rate of $595,000
per day over three years. It adds $652 million in revenue
backlog, bringing Atwood's total revenue backlog to around $3.9
billion as of June 10.
Haithum Nokta, an analyst at Clarkson Capital Markets, notes
that the Achiever might eventually move to other operating
locations "for which the day rate will be properly adjusted" for
differences in taxes and operating costs.
"We believe other potential locations may be Mauritania and
Suriname," Nokta added. "We view the contract positively, and the
rate comes in line with recent fixtures in the region."
Two more new contracts, both for existing rigs, were also
announced this month.
One of them involves the Atwood Beacon, a jack-up rig that is
currently operating off the coast of Israel under an agreement
with Italian energy company Eni S.p.A. When that work ends,
probably in July, the Beacon will move off the coast of Italy
under a new two-year contract that will add $128 million in
The other contract, with Shell Offshore, involves the Atwood
Condor semisubmersible rig. Work under the new contract will
probably begin in late August. The contract is for 39 months and
involves a day rate of about $550,000 for a drilling program in
the U.S. Gulf of Mexico. It adds about $502 million in revenue
Financially, Atwood has produced pretty steady growth over the
past few years, with only the occasional hiccup.
Sales And Earnings
The company has run off three straight quarters of
double-digit sales and earnings growth. During its fiscal second
quarter, which ended in March, it logged earnings of $1.28 a
share. That was up 42% from the prior year and a nickel above
consensus analyst estimates.
Revenue for the quarter gained 48% to $253.2 million, the
highest increase in more than four years, but slightly below
The company's stock price touched a nearly five-year high of
56.71 June 18 and currently trades near 55.
Analysts polled by Thomson Reuters expect fiscal Q3 earnings
of $1.34 a share, which would be a 70% year-over-year gain.
Profit for the full year is seen rising 25% to $5.16 a share.
"(Atwood) has the mix of backlog and newbuild catalysts that
we find attractive, and we believe more announcements of
ultra-deepwater contracts will result in further rig additions
and continued multiyear earnings growth," noted Matt Beeby, an
analyst at Williams Financial Group.
The movement of day rates will play a part in future earnings.
Analyst Macpherson says current day rates "are pretty mature,"
and are not likely to go much higher.
"But I also don't think they are vulnerable to collapse
either," he added.
What has gone up are costs to operate the rigs, mainly because
heightened competition for labor has narrowed the number of
skilled crew members.
"The top end of the labor spectrum is very competitive right
now, so those costs have been rising," Macpherson said.
"Insurance costs are also rising. You tend to see higher costs on
everything in these kinds of expansionary cycles."