Atwood Oceanics: Don't Fret Start-Up Problems

| About: Atwood Oceanics (ATW)


Outside start-up issues, modern fleet to provide advantages going forward.

Revenue efficiency remains very high on established fleet.

Atwood Oceanics trades at an attractive valuation compared to larger competitors.

Due to circumstances mostly out of the control of Atwood Oceanics (NYSE:ATW), the company reported a sharp decline in profits during the quarter ended in March. Outside of a large gain related to the sale of a legacy rig, the company only produced earnings of $0.76 compared to $1.28 in the prior year period. With the deepwater sector hit by constant doom and gloom analyst reports, the solid stock action suggests investors understood the long-term potential of the mostly modern fleet owned by Atwood.

Though the stock hasn't moved in the last few months, the quarterly report for Q314 ending in June provided further evidence that not fretting over short-term startup issues of new rigs was the right move. This quarter, the company reported earnings jumped to $1.11 per share with revenue hitting a company record at $293 million. The earnings were slightly above analyst estimates for Atwood to earn $1.08.

The interesting part is that the mixed numbers over the last two quarters were in great contrast to the large earnings beats by Ensco plc (NYSE:ESV) and Noble Corp (NYSE:NE). While these bigger players smashed earnings estimates for the last couple of quarters, analysts actually expect declines or limited upside going forward for those two companies compared to the big bounce expected with the earnings from Atwood Oceanics.

One Time Hit

According to Atwood Oceanics, the company took a major hit from vendors delaying equipment shipments for the new Atwood Advantage ultra-deepwater drillship. The start-up issues negatively impacted the quarter ending in March with 22 zero rate days in the last month of that quarter. Even worse, the rig didn't reach fully operational until April 23 causing a similar impact to the recently reported quarterly earnings. On top of that, the rig encountered another 25 zero rate days in June due to an electrical issue.

The good news is that the rig hit 90% revenue efficiency during July. At least for the fourth fiscal quarter, the company will benefit from a whole quarter of operations on the drillship contracted at $584,000 per day.

The hit from zero rate days led to a revenue efficiency rate of 93% for Q214 and only 89% for Q314. Atwood suggests the rate was 99% for the latest quarter absent the issues with the new rig.

Ensco generated a revenue efficiency rate of 95% in the second quarter though rig utilization was only 85%. The utilization in the floater segment where Atwood Oceanics obtains the majority of its revenue plunged to 77% from 87% a year ago. The company continues to be efficient though it is struggling to keep some old rigs working.

Earnings Drag

The other major earnings drag during the quarter was the deepwater Atwood Hunter that underwent regulatory inspections and equipment upgrades during the quarter. The downtime for this rig contributed to the deepwater group producing $33 million of less revenue while costing nearly $8 million more during the quarter ended in March. Further bad news is that the rig didn't start new work until August at a contract rate of $515,000.

Despite the contract issues with the above rig, Atwood Oceanics has very limited exposure to the contract market in the floater sector until the new Atwood Admiral is delivered in the March time frame of next year. Right now, the company is 100% contracted for the rest of the year and a solid 81% for 2015. Considering the new rig is more an issue of finding the right customer, the only real exposure is the Atwood Hunter.

In the case of Noble Corp., the company smashed analyst estimates for Q214 of $0.65 by earning $0.93. The driller was able to keep costs under check while existing contracts ran their course. The bad part for investors is that analysts expect a deterioration in earnings for at least the next couple of quarters and into 2015. As an example, analysts forecast the company only earning $0.59 in Q314. Those expectations are down $0.06 from the Q214 numbers that the company smashed.

Bottom line

Considering Atwood Oceanics has numerous new rigs and reached revenue efficiency rates in the 99% range, investors should consider the start-up issues with the new drillship as one-time in nature. The company has an excellent track record over the last couple of years and nothing changes that scenario.

Though numbers continue to decline for FY15 ending next September, Atwood trades at only 6.8x current analyst forecasts. Both Ensco and Noble trade at higher multiples despite expected weakness going forward. With a mostly modern fleet, the Atwood Oceanics is very attractive at these prices.

Disclosure: The author is long ATW. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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