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Atwood Oceanics Finds Success Far From Its Texas Home

Posted
6/25/2013 4:44:00 PM
By: Investor's Business Daily
Referenced Stocks:ATW;CVX;KOS;NBL

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 ( ATW ) 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 construction.

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 ( CVX ),Noble Energy ( NBL ) andKosmos Energy ( KOS ).

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 historical norm.

Competitive Advantage

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. International.

"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 deep.

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 profits.

"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 assets."

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 revenue backlog.

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 backlog.

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 views.

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."