Atwood Buys Itself Some More Time

| About: Atwood Oceanics (ATW)

Summary

Company improved its liquidity position by further delaying shipyard payments.

These actions have shifted liquidity crisis by a couple quarters forward into late 2017.

For those investors, who think ATW survives this cycle, unsecured bonds maturing in 2020 offer better risk/reward potential.

Atwood Oceanics (NYSE:ATW) reported stellar quarterly earnings, but even the CEO had to admit on the conference call that liquidity is the only thing that matters to investors at this time. ATW's stock traded briefly below $5 as a cursory look at company's contractual backlog past 2016 puts serious doubts on the survival of the common equity.

For all those who still hold ATW's equity I have some positive news: the company will be able to hold out longer than currently anticipated by the market. Whether this would ultimately matter or not depends entirely on the price of oil in 2017 and subsequently on the pickup in offshore rig utilization. Notice, I didn't mention pickup in dayrates, as that is not going to happen for quite some time, however, pickup in utilization would do wonders for ATW because company's cost structure has seen significant improvement.

The company expects fiscal year 2016 operating expenses to be slightly above $400 million. This number includes $70k/day being paid to the shipyard for two idle newbuilds not inclusive of interest expenses. Moreover, remaining capex for fiscal year 2016 is less than $90 million, inclusive of $10 million in capitalized interest. G&A expenses are expected to be slightly down and all of the above leads to a nice cash build that ATW will enjoy over the next three quarters.

My conservative estimates of $750 million in remaining fiscal 2016 revenue translate into $350 million in cash buildup assuming a $60 million uplift from working capital position. ATW's projected liquidity position at the end of September 2016 looks to be as follows:

Cash - $500 million

Current assets (ex cash) - $290 million

Current liabilities - $ 110 million

Long-term debt - $1.6 billion

It still does not look pretty considering ATW is on the hook for $400 million for the remaining installments on two newbuilds, but at least it bought itself some time to accumulate cash on the balance sheet and a little prayer that oil price is higher at the end of 2016 resulting in improved utilization.

Given ATW's focus on lowering its cost base, it can offer E&P operators dayrates around $250k/day and still generate positive operating cash flows. The trouble is, operators are not interested in contracting offshore rigs at any dayrate at this point in time making this excellent cost-cutting exercise irrelevant.

One way, the company can add value is to use some of its still robust cash flows to buy back unsecured bonds trading around 36. The liquidity is not very significant in those bonds so I'm not sure how much can be repurchased. However, whatever company is able to buy back on the market will generate excellent return on these transactions.

The doomsday scenario has been pushed out two quarters into late 2017. That's 18 months for ATW's equity holders to either survive or fold the cards. The company needs to generate $200 million backlog for fiscal 2017 and $400 million for fiscal 2018 to avoid restructuring. Unsecured bonds trading at 36 are an enticing proposition for investors who are still bullish on ATW's prospects and clearly have better risk/reward characteristics compared to common equity.

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.