Atwood Oceanics - What Shareholders Can Reasonably Expect For 2016 And Beyond

| About: Atwood Oceanics (ATW)

Summary

Atwood Oceanics is a mid-tier offshore driller that has recently suffered a significant drop in its stock price. Why has the stock dropped so fast so low?

It is difficult to rate Atwood Oceanics because we do not have any clear visibility regarding the price of oil and, consequently, the level of tendering activity later in 2017.

As a long-term investment, I rate ATW as a HOLD, especially with a potential dividend cancellation coming, but for the traders, I see an opportunity arising.

Click to enlarge

Semi-sub Atwood Condor

This article is an update of my preceding article on Atwood Oceanics (NYSE:ATW) published on November 11, 2015 regarding the Q4'15 results.

Complete fleet status and analysis as of November 2, 2015:

1. UDW - Ultra-Deepwater Drillships/Semisub

# Name

Contract

End

Current

Day Rate

K$

2016 2017 2018 2019 +
1

Atwood Achiever

8/2014

11/18 495.5 12 11 0 0
2

Atwood Archer

6/2017

Cost: $635 million

Available

Q3'17 ?

Letter of exclusive negotiation for contract starting Q3'17 in Brazil

385?

0 3(?) 12(?) 21(?)
3

Atwood Admiral

3/2016

Cost: $635 million

Available Letter of exclusive negotiation for contract starting Q3'17 in Brazil 0 0 0 0
4

Atwood Advantage

2013

9/16

9/16-12/16

12/16-8/17

584

Lower rate

584

12 8 0 0
5

Atwood Condor

2012

11/16 555 11 0 0 0
6

Atwood Osprey

2011

5/16 455 5 0 0 0
Sub-Total 1 40 22 12 21
Click to enlarge

New development:

"And just this morning, we announced that the Atwood Advantage has been awarded approximately four months of plug and abandonment work for our client, Noble Energy, here in the Gulf of Mexico. This work is likely to begin in late summer 2016. And when it does, we will suspend our current operating rate in favor of a lower operating rate during the P&A work. We will then revert to the previous higher rate once the P&A work is complete. With this additional term, the Advantage will be under contract until approximately August 2017."

Also, Atwood indicated that it:

"...has received a letter confirming that it has been chosen to enter exclusive negotiations with an undisclosed operator to conclude agreement on a drilling program offshore Brazil commencing in the third quarter of 2017. The letter specifies that either the Atwood Admiral or Atwood Archer, ultra-deepwater drillships currently under construction at the Daewoo Shipbuilding & Marine Engineering Co., Ltd yard in South Korea, would be contracted to drill the program. The letter specifies a number of contractual items that have been agreed by the parties, including the commercial rates, well count, minimum term length, and rig acceptance criteria."

About the holding cost for the newbuild Atwood Admiral and Atwood Archer:

"We are budgeting holding costs for the Atwood Admiral and Atwood Archer commencing November 2015 and July 2016, respectively. These holding costs are approximately $35,000 per day, per rig, excluding DSME financing charges of approximately $15,000 per day, per rig. We will look to reduce these costs over time."

I estimated a minimum of 2-year contract at $385k/d including mobilization. This is still to be confirmed.

2. Semi-submersibles, old spec

# Name

Contract

End

Current

Day Rate

$K

2016 2017 2018

2019+

1

Atwood Eagle

1982

9/16 440

9

0 0 0
2

Atwood Falcon

1983

3/16 430 3 0 0 0
Sub-total 2 12 0 0 0
Click to enlarge

3. Jackups and Others

# Name

Contract

End

Current

Day Rate

$K

2016 2017 2018 2019 +
1

Atwood Aurora

2008

9/16 158/185 9 0 0 0
2

Atwood Beacon

2003

6/16

€117.155

6 0 0 0
3

Atwood Mako

2012

Available 0 0 0 0
4

Atwood Manta

2012

Available 0 0 0 0
5

Atwood Orca

2013

10/16 85 10 0 0 0
Sub-total 3 25 0 0 0
Click to enlarge

Revenues per segment 9 months:

Segment Q4'15 Q3'15 Q2'15
UDW 197 174 183
DW 79 77 82
JU 73 67 73
Reimbursable 14 13 12
Total 363 331 350
Click to enlarge

Note: I do not include the reimbursable amount of approximately $50-$60 million per year.

Backlog

The contract revenue backlog is currently $1.6 billion as of September 30, with 66% of available days contracted for fiscal 2016.

Atwood Q4'15 Results - November 9, 2015

Q4'15 Q3'15 Q2'15
Revenue in $ Million 363.18 330.56 350.39
Net Income $ Million 150.69 112.99 122.7
Earnings per share in $ 2.32 1.73 1.89
Operating income $ Million 178.63 134.20 147.81
Shares Outstanding basic in Million 64.654 64.653 64.644
Cash and Cash equivalent in $ Million 113.98 74.50 90.23
Long-term Net Debt $ Billion 1,686 1.65 1.63
Drilling cost in $ Million 127 143 140
Dividend 0.25 0.25 0.25
Enterprise Value $ Billion 2.78 2.89 3.04
EBITDA $ Million ("ttm") per Yahoo 785.96 690.98 614.61
EV/EBITDA 3.54 4.18 5.77
Capital expenditure $ Million 448.02/1Y 241 177.13/6m
Click to enlarge

During the twelve months ended September 30, 2015, the Company recorded a non-cash impairment charge of approximately $60.8 million($56.1 million, net of tax, or $0.86 per diluted share) related to the Atwood Hunter. In addition, the Company recorded a loss of approximately $5.5 million ($5.5 million, net of tax, or $0.08 per diluted share) for the sale of the Atwood Hunter and a loss of approximately $8.0 million ($7.1 million, net of tax, or $0.11 per diluted share) for the sale of the Atwood Southern Cross.

Debt snapshot (from last 10-K filing on 11/12/15).

1 - Covenants

"In addition, our senior secured revolving credit facility (the "Credit Facility") contains various financial covenants that impose a maximum leverage ratio of 4.0:1.0, a debt to capitalization ratio of 0.5:1.0, a minimum interest expense coverage ratio of 3.0:1.0 and a minimum collateral maintenance of 150% of the aggregate amount outstanding under the Credit Facility.

In July 2015, we entered into a third amendment to the Credit Facility providing that, among other things, effective upon our obtaining a specified amount of additional unsecured capital through one or more qualifying capital raises and a subsequent permanent reduction in the commitments under the Credit Facility in an amount equal to at least 70% of the net proceeds from such capital raises, ("i") the maximum leverage ratio will be replaced with a senior secured leverage ratio of 3.0:1.0 and ("ii") the minimum interest expense coverage ratio will be reduced from 3.0:1.0 to 1.75:1.00."

2 - Debt

Senior Notes 6.5% due 2020 ("Senior Notes") $655.946 million
Revolving Credit Facility $1,030.0 million
Total $1,685.646 million
Click to enlarge

Commentary

Atwood Oceanics is a mid-tier offshore driller that has recently suffered a significant drop in stock price, and many investors, including myself, are wondering if the stock is now undervalued and really why the stock has dropped so fast so low?

Answering this question is a very difficult task, of course. Looking at the price per share, ATW has dropped approximately 65% in 6 months and it is not the only one OSD that has collapsed when the price of oil fell below $35 a barrel.

The basic answer is that the street is not comfortable with the business outlook beyond 2016, and ATW has a large drop in revenue in 2017 - see graphs above - which leaves many wondering how will the company be able to survive this bear cycle?

First, it is almost certain that the dividends will be soon canceled or at least reduced by 80%. It is an imperative decision, and this move should have been done last year, already. It is a cost of $65 million per year that not one offshore driller can afford in this extremely depressed environment. Is it possible that this outcome is hurting the PPS, as we speak?

Looking at the future contract backlog, the problem starts to be more serious in 2017, with a significant drop of revenue assuming no tendering activity and a significant expense for the two newbuilds.

I am hopeful that we will see a return to a normal tendering in the second half of 2016 or early 2017, but this contracting activity will translate in real revenue only in H2 2017. This situation is showing clearly the strong headwinds that ATW will have to face next year.

However, I still believe ATW has a manageable debt and will be able to survive this downturn without a restructuring that could be terrible for the commons.

However, when we look at the bond, the street is clearly signaling that ATW will not be able to make it by 2020. The bond is now trading at $52, a pattern that we have seen in many other offshore drillers as well, when the oil prices dropped below $35 late December.

Source Quotenet: Atwood Oceanics Inc. Obligation 6.5% Coupon bis 2/1/2020.

Conclusion

It is difficult to rate Atwood Oceanics now because we do not have any clear visibility regarding the price of oil and, consequently, the level of tendering activity later in 2016-2017.

If you are an optimist and believe oil prices can reverse this terrible trend around Q3'16, as I do, then ATW is an excellent buy right now. However, if the price of oil stays depressed longer, then ATW will be facing some serious troubles, and the PPS will continue to degrade significantly.

As a long-term investment, I rate ATW as a HOLD, especially with a potential dividend cancellation coming, but for the traders, I see an opportunity arising.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: I am trading ATW