Having lost over 55% of its value on the stock market in the past year, Atwood Oceanics (NYSE:ATW) currently trades at the lower end of its 52-week range. This is not surprising, as offshore drillers have been under pressure in the past year on account of increasing production in the U.S. shale and low oil prices, which has forced oil companies to idle offshore rigs and lower capital budgets.
Looking ahead, there is a possibility that offshore oil drillers will continue remaining under pressure in the near-term due to further cuts in deepwater spending by companies such as ConocoPhillips (NYSE:COP). Moreover, Susquehanna believes that the offshore drilling segment might see more weakness going forward, as "newer, high-specification rigs are now rolling off contract without being renewed points to a more protracted downturn than previously anticipated."
The above discussion indicates that offshore drilling contractor Atwood Oceanics might see further downside going forward. However, in my opinion, investors should not overlook the opportunity in the offshore drilling segment, as this market is expected to grow at a good pace in the long run provided we see past the short-term pain.
More importantly, Atwood has turned in a resilient performance over the past year despite a shrinking market. This can be clearly seen in the following chart:
Thus, Atwood has delivered impressive growth in both its revenue and gross margin in the past year, while its cash flow has improved at an even more impressive rate. In fact, last quarter, Atwood's revenue was up 28.3% year-over-year on the back of a strong operational performance across its fleet. Similarly, its earnings rose to $1.89 per share compared to $1.13 per share in the alike period last year, and the company beat expectations on both counts.
But, despite this strong performance, Atwood Oceanics has tanked in the past few months due to the overall negativity in the industry. Moreover, investors seem to be ignoring the fact that the company has 96% of its available days for the year already under contract, while for next year, 55% of its available days are under contract. Thus, it is evident that Atwood is still seeing demand for its services.
But, a headwind that the company faces is the decline in day rates. However, in the long run, this problem should not be a big issue as the clearing price of ultra deepwater rigs is expected to remain at $235,000 per day in 2016, as per Barron's. However, by 2018, this rate is expected to improve to $470,000 per day.
Atwood currently has two under-construction drillships -- the Atwood Admiral and the Atwood Archer -- at the DSME shipyard. The Atwood Admiral is expected to be fully constructed and commissioned by September 2015. But, Atwood has entered into an accord with the DSME shipyard, under which it will maintain the rig at a cost that is about 25% to 50% of what it would cost outside the shipyard in a ready mode.
Additionally, Atwood has retained an option that will allow it to delay the Admiral's completion by another six months to September 2016. A similar accord is in place for the Archer as well, which is scheduled for completion and delivery in June 2016. As a result of these agreements, Atwood will be able to launch these ships at the proper time with minimum costs.
In light of the current oil environment, this is a smart move by Atwood as operators are showing little interest in increasing offshore drilling. Recent numbers have shown that new fixtures for both floaters and jack-ups are down considerably from year-ago levels. According to CEO Robert J. Saltiel, "We expect that rig demand is likely to continue to trend downward for both floaters and jack-ups over the next year as big numbers of working rigs will see their contracts expire during this time."
It is evident that the offshore drilling segment is under pressure this year, but matters are expected to improve in the long run. According to Alberto Ramos of Goldman Sachs (NYSE:GS), "Lifting costs are such that deep water development in the Gulf of Mexico remains viable even at current prices," he says. "But developing a new offshore frontier takes four to six years."
So, while the offshore drilling market might remain under pressure in the short run, the long-term prospects are still intact due to economic viability. In fact, according to a report by Markets and Markets, the offshore drilling rigs industry is anticipated to increase from $66 billion at the end of 2014 to $102 billion at the end of 2019, clocking an annual growth rate of 9.27%. This will be a result of an increase in offshore rigs, which will lead to an increase in offshore production. As per Douglas-Westwood:
"Offshore, the developing shallow water gas and highly productive deepwater sectors will offset the effects of an aging shallow water oil sector into the forecast, with complete offshore oil & gas production set to rise 22% by 2020."
From the arguments presented in the article, it is evident that Atwood Oceanics can get better going forward. The company has turned in a resilient performance in adverse circumstances, while its cost management moves also see good. Looking ahead, the prospects of the offshore drilling market look positive in the long run. Thus, in my opinion, investors should consider buying Atwood shares for the long run, and its steep drop in the past year is an opportunity in disguise.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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