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Atwood Oceanics (NYSE:ATW)

Q3 2011 Earnings Call

August 04, 2011 10:00 am ET

Executives

Mark Mey - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Robert Saltiel - Chief Executive Officer, President, Director and Member of Executive Committee

Analysts

G. Scott Burk - Canaccord Genuity

Matthew Beeby - Global Hunter Securities, LLC

David Wilson - Howard Weil Incorporated

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Operator

Good day, and welcome to the Atwood Oceanics' Third Quarter Fiscal Year 2011 Conference Call. [Operator Instructions] Please note this call will be recorded, and I am standing by if you need any assistance. It's now my pleasure to introduce today's speakers, Mark Mey, Senior Vice President and Chief Financial Officer; and Rob Saltiel, President and Chief Executive Officer. Mr. Mey, please go ahead.

Mark Mey

Thanks, Natasha. Good morning, and welcome to Atwood Oceanics' conference call and webcast to review the company's operating results for the quarter ended June 30, 2011. The speakers today will be Rob Saltiel, President and CEO; and I, Mark Mey, Senior Vice President and CFO.

Before we begin, let me remind everyone that during the course of this conference call, we may make forward-looking statements, which are not historical facts and are based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us. These statements involve a number of risks and uncertainties, including the risks which are described in the company's most recent Form 10-K and other filings with the U.S. Securities and Exchange Commission. We caution that forward-looking statements are not guarantees, that actual results could differ materially from those expressed or implied in the forward-looking statements if one of these risks or uncertainties were to occur or our assumptions prove incorrect. Undue reliance should not be placed on these forward-looking statements, which are applicable only at the date hereof.

Now let me turn the call over to Rob for his opening comments.

Robert Saltiel

Thanks, Mark, and thank you for joining today's earnings call on our fiscal third year -- third quarter results. As usual, I will make a few comments on the past quarter's highlights and refresh our market outlook before handing it back to Mark to discuss the financial results.

Let me start by saying that overall, we had another solid quarter of financial performance. Our net income of approximately $75 million represented the second-best quarter in our company's history, while our earnings per share of $1.15 was our third best ever. We are pleased with these results, and they are due in large part to 2 objectives that have the Atwood team's full focus and attention: delivering reliable service and managing our costs wisely. Mark will provide additional context on our quarter's numbers during his discussion.

Operationally, we fulfilled our primary objective of delivering a very strong startup for the Atwood Osprey. The Osprey commenced its 3-year contract with Chevron on May 27, and the rig achieved approximately 95% revenue efficiency in the 35 days it operated during the last quarter, once you exclude the contractually agreed 0 rate time for commissioning and testing. The Osprey's reliability has continued to remain strong into this quarter as we achieved approximately 95% revenue efficiency for the month of July.

These excellent results are due to a combination of factors: strong collaboration with the Jurong Shipyard team, selective recruitment and extensive training of our offshore personnel, thorough testing of the Osprey systems and equipment and the adoption of a common vision with Chevron around competency, assurance and performance excellence.

I want to take a moment to commend our entire operations and project organization and especially the Osprey team for their hard work in achieving these fine early results. In so doing, they have enhanced Atwood's reputation for operations excellence and established a blueprint for the trouble-free delivery and startup of our other newbuild rigs.

Outside of the Osprey, the rest of our active fleet had a generally good quarter with operations performance. The third quarter would have even been stronger but for some unplanned downtime that we experienced on the Atwood Hunter, owing to a series of unrelated operational incidences that have since been corrected. For the month of July, the Hunter achieved approximately 99% revenue efficiency.

While we are on the subject of the Hunter, you will have seen on our fleet status report that we issued on Monday that the regulatory-driven out-of-service time for the Hunter occurs this quarter. We have been planning this work, which includes some maintenance-related projects, since the first fiscal quarter. We anticipate approximately 20 days of 0 rate time from this out-of-service period.

There are also 2 other short-term out-of-service periods planned for this quarter for the Vicksburg and the Atwood Beacon. The 5 newbuild rigs that we are constructing in Singapore and Korea remain on track, with no changes to note from our previous guidance on budgets and schedules.

I will remind the listeners that we have 2 remaining options with the DSME shipyard to build drillships identical to the Atwood Advantage. These options expire in late October.

We also retained 2 options with the PPL Shipyard to build jack-ups identical to the Mako, Manta and Orca. These options expire at the end of December.

The decisions on whether or not to exercise these options will be made in consultation with our board as the exercise dates get closer, so we don't plan to disclose any definitive plans on this call.

Turning now to our general market outlook. We have seen further improvement in both the jack-up and floater segments of the offshore drilling market since our last earnings call. The number of bids and inquiries that our marketing team is responding to continues to trend up quarter-to-quarter.

Starting with the jack-up segment, we have seen an increase in overall utilization of the worldwide fleet on the back of increasing demand. Markets that are showing the most demand momentum include Southeast Asia, the Middle East, West Africa and Mexico. As a result of increasing activity, rates are strengthening for both high-spec and low-spec jack-ups versus where we were last quarter.

Turning to floaters, we see a similar story of general improvement. Rates for the ultradeepwater segment are trending toward $500,000 per day, while demand visibility is increasing for both ultradeepwater and deepwater rigs. A number of previously uncontracted newbuilds have found work since our last call, and we now count only 4 uncontracted newbuilds scheduled for delivery before year-end.

I spoke on our last call about the key catalysts for

the ultradeepwater market being the Gulf of Mexico and Petrobras. And since then, developments have trended favorably on both fronts.

In the Gulf of Mexico, well permitting has picked up in the second quarter versus the first quarter, and we hear from operators that the process has greater clarity than it did a quarter ago. However, the pace is still too slow for our industry, and the lingering uncertainty does hamper the ability of some operators to make longer-term rig commitments.

Turning to Petrobras, they had contracted 3 ultradeepwater rigs since our last call and have 2 contract -- 2 tenders currently active for deepwater rigs. The continued absorption of available deepwater or ultradeepwater capacity by Petrobras remains a key factor for our business.

On the marketing front, we extended 2 of our jack-ups and secured a short extension on one of our floaters since the last call. Yesterday, we announced that Vicksburg will continue drilling for NuCoastal in Thailand through at least December of 2012, with our client's exercise of a 6-month option coupled with an additional 6-month extension at a slightly increased day rate. The Vicksburg continues to perform very well, and this extension is testament to that.

We also had signed the Atwood Aurora to a firm 8-month deal in June with Noble Energy for work in Cameroon and Equatorial Guinea. The rig has completed its shipyard upgrades, and we'll mobilize from the Mediterranean to West Africa in September for an expected contract start in early October.

We also signed a 45-day 1-well program on the Atwood Eagle with BHP in early May. We continue to work on additional fixtures for both the Eagle and the Atwood Falcon as both become available in early calendar year 2012. Discussions around these 2 rigs have been ongoing for some time, so we won't be able to provide any more details at this time. The Atwood Beacon, also available in the March 2012 time frame, is being marketed to a number of suitable high-spec programs.

Our marketing of the Atwood Condor has heated up considerably since our last earnings call. We are now seeing multiple tenders and inquiries that dovetail well with the Condor's expected delivery date in late June of 2012. A quarter ago, operators we were speaking with were concerned primarily with filling 2011 demand slots.

The same increase in marketing activity is true for the Atwood Mako, our first Pacific Class jack-up slated for delivery in late September 2012. We are actively courting a number of drilling programs scheduled for that time frame.

This concludes my opening remarks, so I'll hand it back to Mark to provide some more detail on our financial results and outlook. Mark?

Mark Mey

Thanks, Rob. Let me now walk you through our financial results for the fiscal third quarter ended June 30, 2011. I will then compare this quarter to the quarter ended June 30, 2010, and also to the previous fiscal quarter. Finally, I will discuss our expectations for the remainder of fiscal 2011.

Our diluted earnings for the quarter ended June 30, 2011, were $1.15 on revenues of approximately $162 million as compared to earnings of $0.91 on similar revenues for the same period in 2010. This 26% year-on-year improvement was achieved with 186 fewer operating days during this quarter as the Seahawk, Richmond and Southern Cross were cold stacked the entire quarter, while only the Southern Cross was stacked during the corresponding quarter in 2010. This was partially offset by the Atwood Osprey beginning operations in late May 2011.

Financial highlights achieved during the quarter include the successful delivery of Atwood Osprey from the Jurong Shipyard on April 27 and the startup operations with Chevron in Australia on May 27.

Although revenue efficiency was 91% for the quarter, 4% of these 0 rate days were contractually driven. For example, after successfully running the first 8 anchors, we went under 0 rate while we ran the remaining 4 anchors for the contract. Secondly, average day rates of $303,000 per day as compared to $231,000 per day during the same period in 2010 and also up $8,000 per day from the prior quarter. Despite the Atwood Hunter incurring 17 days of 0 rate due to unplanned maintenance, revenue efficiency of 93% was achieved during the quarter as compared to 97% for the same period in 2010.

The Atwood Aurora fulfilled its contract with RWE in Egypt on May 16. Thereafter, the rig mobilized to a shipyard in Palermo, Italy to complete minor enhancements. It is currently waiting to begin an 8-month contract with Noble Energy in Cameroon, NAG. And then finally, good operating and G&A cost control for the third consecutive quarter.

Contract drilling costs totaled $53 million for the quarter as compared to $63 million for the same period last year, which included operating costs for the 3 cold-stacked rigs previously mentioned.

Operating margins increased from 51% in the same period last year to 55% this quarter, and net margins increased from 35% to 46%. These improvements in operating performance are attributable to both cost control and high revenue utilization. Note that due to the smooth startup on the Atwood Osprey, certain previously forecasted startup costs were not incurred during the quarter.

Finally, interest expense of $1.9 million includes $100,000 write-off of unamortized debt issue expenses associated with the refinancing of our 2 credit facilities in May of this year.

Let's discuss quarter-on-quarter trends by comparing this quarter to the second fiscal quarter ended March 31, 2011. Revenues increased $3 million or 2%, and earnings per share increased $0.07 or 7%. This improvement is due to the increase in average day rates and lower operating costs as we worked 4 less days during this quarter.

Looking at the balance sheet, capital expenditures totaled $79 million during the quarter and consisted primarily of final payments on the Atwood Osprey and progress payments on the Atwood Condor.

During the quarter, we reduced our long-term debt balance from $455 million to $400 million, and consequently, cash also decreased from $162 million to $113 million during the quarter. As a result, our net-debt-to-capital remained at 15% quarter-on-quarter.

As I previously mentioned, we refinanced our 2 credit facilities with a $1.1 billion revolving credit facility due 2016. Subsequent to the end of the quarter, we proactively hedged a portion of our interest rate risk on a month outstanding on the credit facility.

I will now comment on certain items that could impact results for the remainder of fiscal 2011.

Firstly, as noted in our fleet status report on Monday and as discussed in previous conference calls, we expect to incur 0 rate days on our rigs fleet due to rig upgrades or regulatory inspections as follows: the Atwood Hunter, 20 days in September; the Atwood Beacon, 5 days; and the Vicksburg, approximately 5 days during the quarter.

We currently expect total drilling costs for the fiscal fourth quarter 2011 to approximate $70 million to $72 million. The increased quarter-on-quarter costs are attributed mainly to some O&M projects planned for the fiscal third quarter, which will be performed in the fiscal fourth quarter; the number of scheduled regulatory inspections and plant upgrades being completed during the quarter; and the Atwood Osprey operating for the entire quarter in Australia.

We expect general and administrative expenses for the fiscal 2011 to range between $43 million and $45 million, and that's about $10 million for the fourth quarter.

Depreciation is expected to increase by approximately $4 million in the fiscal fourth quarter due to the Atwood Osprey's fourth quarter operations, as mentioned above.

Our effective tax rate for the quarter was 14%, reducing our year-to-date effective tax rate to 17.5%. If you recall, the prior quarter, tax rate was 22%, and that included certain FIN 48 adjustments. I fully expect our fiscal 2011 effective tax rate to range between 16% and 18%.

Capital expenditures year-to-date 2011 totaled $499 million, of which $262 million represents down payments on the newbuilds ordered this fiscal year and $237 million in final and progress payments on the Atwood Osprey and Atwood Condor and other maintenance CapEx.

For the remainder of fiscal 2011, we expect to incur $85 million, representing progress and other payments on the Atwood Condor of $75 million and maintenance and other CapEx of $10 million. Other CapEx includes project management and OSP [ph] on the rigs under construction.

Our current revenue contract backlog approximates $1 billion and is expected to provide approximately $600 million in future after-tax cash flows.

That concludes my prepared comments today. I'll now turn the call over to Natasha for questions. Natasha?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the side of David Wilson with Howard Weil.

David Wilson - Howard Weil Incorporated

Rob, you mentioned in your prepared comments about Petrobras and the couple tenders they had there, and one of them -- there was 2 different requests for more semis. Were those already kind of in your contemplation for demand for the moored semi-rigs over the next couple of years? And also, would that be something that you guys are taking a look at for the Falcon and Eagle?

Robert Saltiel

Thanks, Dave. We certainly are taking a look at that tender because they have opened it up to a moored rig as well, and we know that it's going to be a competitive tender. I think a number of our competitors have commented about that tender as well. We're going to take a look at that in context with other opportunities we have for our 5,000-foot moored rigs. And to the extent that we find it interesting and technically well suited to our rigs, we'll move forward on it.

David Wilson - Howard Weil Incorporated

Okay. And then kind of a follow-on to that, you mentioned technically suited. Do you envision any kind of sizable capital upgrades or modifications required to work off Brazil?

Robert Saltiel

Well, we're just in the process now of going through that tender and thinking about how to respond to it, and so some of the questions about technical capabilities typically result through that process. From my previous experience down there, a lot of these things can be negotiated, but some are going to be firmer. And you really don't understand exactly what's going to be the technical ask until you go through the process. But there isn't anything specific to that tender that we'd say is a showstopper at this point, for considering our 5,000-foot moored rigs.

David Wilson - Howard Weil Incorporated

Okay. And then if you've got some time I would like to ask another one on the operational efficiency. I guess with the Osprey, it was very good getting that one out the door. But as your fleet gets bigger, do you think Atwood can maintain kind of this level of good operational efficiency? Or is there something inherent with a larger fleet that prevents kind of these levels of efficiency from being achieved?

Robert Saltiel

Well, there's nothing inherent with a larger fleet that prevents these things from being achieved. We are undertaking a very careful and organic growth process here, and in doing so, we're making sure that the standards that we've set for how we run our rigs are absolutely replicated on each rig that's added to our fleet. Again, I think the Osprey is an excellent example of our ability to deliver a rig from the shipyard, get it out for a very demanding client, as Chevron should be, given the importance of their program, and then perform extremely well coming out of the gate. So that's the blueprint for success at Atwood, and we're going to continue to maintain that as we grow our fleet in the future.

David Wilson - Howard Weil Incorporated

Okay, great. And one final one, kind of a little longer-term. In the past, you discussed how the Osprey's has been outfitted to operate in most areas of the world, with specific mention to the Gulf of Mexico. Do you see the potential for some of your other floater rigs to have to go through some kind of modifications, even if they're not likely to do any work in the Gulf of Mexico, but maybe it's operator-driven as requiring to come to kind of the Gulf of Mexico standard? Is that something that you guys have been taking a look at?

Robert Saltiel

Well, we've absolutely been taking a look at it, and we participate in the industry forums as well as I have a number of discussions with our clients about this. I will tell you that it's an evolving picture. It's developing. I know a number of folks have written about the opportunity or perhaps the requirement down the road for enhanced BOP capabilities in terms of the number of shear rams or the total number of rams on the BOP stack for additional redundancy. Those are the kinds of things we look at, and we are contemplating as part of our overall potential plans for investment in our rigs. But I will tell you that a lot of this is still very client-specific. We haven't seen any blanket requirements along these lines anywhere outside of the Gulf of Mexico in terms of the geographic location, so it really is something that we have to kind of watch and wait and then do our homework technically so that we're ready for it.

David Wilson - Howard Weil Incorporated

Okay. And it just kind of -- it just sounds like -- if you could put a ballpark guess on the time frame. I mean, this doesn't sound like anything kind of near-term impactful at all, maybe 2 or 3 years out. Is that kind of the way to think about it or maybe even longer than that?

Robert Saltiel

I think a 2- to 3-year time frame is a pretty fair guess, yes.

Operator

Our next question comes from the side of Scott Burk with Canaccord.

G. Scott Burk - Canaccord Genuity

I wanted to ask you about potential downtime going into 2012. You've, obviously, in your fleet status of the days for the next few quarters. But going in 2012, can you give us idea of how many rigs might be down? What kind of off-hire days you might have then?

Robert Saltiel

We're just in the process now of going through our budget for 2012. And as that process is being undergone right now, it's a bit premature to give specifics as to the downtime that we expect. I will say that we have seen over the last year a lot of the [indiscernible] take place on our big rigs. So going forward directionally, the planned out-of-service time that's required for regulatory inspections should be relatively good versus where we were, let's say, over the last 12 to 18 months. But I don't want to be too definitive about that now as we're still developing our budget. And in future fleet status reports, we'll be able to provide more clarity to the market about potential out-of-service periods.

G. Scott Burk - Canaccord Genuity

Okay, good. And then I just had kind of one broader question. There's been a lot of discussion about this whole debt default crisis or discussion in the U.S. Congress, and got the deal done this week, but the stock market's been pretty weak since then. Have you guys seen any kind of hesitation on the part of your clients as a result of that, kind of, negative economic macro?

Robert Saltiel

We haven't seen any of that, Scott. I mean, our clients are driven by the oil price and the prospectivity for the areas where they're drilling. And we continue to get a very bullish picture from operators, generally, as they look toward 2012.

Operator

Our next question comes from the side of John Lawrence with Tudor, Pickering.

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Just a quick question on the Eagle. You talked about opportunity in Brazil. Now that you have the Osprey down in Australia, is there enough work down there, you think, to keep the Eagle there?

Robert Saltiel

Yes, we're actually seeing a real increase in potential demand in Australia over the last 6 to 12 months. I think it's driven by a number of factors. The first is that Australia is a place that provides open access, so a lot of operators who are looking for opportunities to enhance their portfolio or to prosecute what they already have, look at Australia very attractively. It's done quite well as a prolific gas basin. And with the opportunity to serve Southeast Asian and Chinese markets, especially with the potential for natural gas to displace coal and perhaps nuclear in that region, I think the prospects for Australia have never been better. So we certainly will look at opportunities closer to home when it comes to extending the Eagle, as well as looking outside the region, if the economics warrant that.

John Lawrence - Tudor, Pickering, Holt & Co. Securities, Inc.

Okay, that's helpful. And then just on the stacked rigs, anything worth talking about or just sort of status quo there?

Robert Saltiel

I would say status quo there.

Operator

[Operator Instructions] The next question comes from the side of Matt Beeby with Global Hunter Securities.

Matthew Beeby - Global Hunter Securities, LLC

The 2011 OpEx now is going to be well below the previous guidance. Can you quantify how much of that original guidance was related to the Osprey startup and maybe some portion that might actually be pushed back into, now, fiscal 2012?

Mark Mey

Yes, Matt. I think last quarter, I gave you guidance around $245 million to $255 million. And I think given where we are right now and in spite of having to move some of the O&M spend that we anticipated in the third quarter to the fourth quarter and having a full quarter on the Atwood Osprey, I think that guidance for the year should come in at somewhere around a $235 million to $238 million range.

Matthew Beeby - Global Hunter Securities, LLC

Anything that was deferred, being pushed into 2012 now?

Mark Mey

I think if you look at the overall year, because if we go back to the first quarter, the guidance was slightly higher than that. Obviously, given drilling programs, planned moves that have been postponed, drilling wells faster or slower than anticipated, some of that has moved. And I will expect that you will see some of that flow into next year, yes. But as we all previously mentioned, we're going through out budgeting process right now, and we'll have better visibility by the end of this month.

Matthew Beeby - Global Hunter Securities, LLC

Okay, that's helpful. And then in terms of staffing, given the fleet additions you're making in coming years, you having any difficulty now as you look forward in finding employees to work on the new rigs? Are there any particular challenges that you're seeing?

Robert Saltiel

Well, we're being real selective about who we hire, and as I mentioned in my opening comments, we think that has played a part in why the Osprey has come out of the gate so successfully. I think we've got a great story here at Atwood Oceanics, and people we talk to outside this company are attracted to our growth story and our reputation as a safe and reliable operator. So we feel like we are as advantaged as anybody in terms of finding the right people outside our organization to augment what we have inside our organization to properly staff these rigs with competent folks. There's no question that there is a human resource challenge in our industry. I think we're all up against that, and so we have to react accordingly and make sure that we're competitive. We're better than that to get the people that we want, but right now, we think we're in a good place to find the people that we need to grow our company.

Matthew Beeby - Global Hunter Securities, LLC

Okay, good. One more quick one, if I can. Can you talk about your marketing strategy on the Beacon? Are you taking more of an international, very high-level global strategy there, marketing in multiple areas?

Robert Saltiel

Yes, I think you have to, I mean, the Beacon is in South America right now. As you know, the Americas is really not the hottest place for high-specification jack-ups. There is some opportunities in the Americas that we are looking at that are close to home, obviously would have a shorter mode [ph]. But we are seeing a lot of opportunities on the other side of the Atlantic as well, so we're going to take a broad look at the market for Beacon follow-on opportunities.

Operator

[Operator Instructions] It appears we have no further questions at this time.

Robert Saltiel

Okay. If there are no further questions, I thank everybody for joining our call, and we'll look forward to picking it up next quarter on our earnings call.

Operator

This concludes today's conference. You may now disconnect, and have a wonderful day.

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