Atwood Oceanics: Expect More Pressure Despite A Good Report

| About: Atwood Oceanics (ATW)
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Atwood Oceanics reports 2Q earnings.

Debt repurchases contributed to results, but they won't be a catalyst in the future.

I remain skeptical on Atwood Oceanics.

Atwood Oceanics (NYSE: ATW) has just reported its second-quarter results. The company, whose fleet status report recently attracted big discussion, earned net income of $99.5 million or $1.53 per share, easily beating analysts' estimates.

Importantly, Atwood Oceanics bought $145.8 million of its senior notes at the open market with an average discount of 34.8%. This purchase contributed to the earnings number.

In July, the company also purchased $42 million of notes through a Dutch auction and it currently has $448.7 million of senior notes outstanding.

Atwood Oceanics is in a very interesting situation. On the one hand, it has backlog problems and the recent contract for Atwood Osprey only added to existing concerns.

On the other hand, the company does not have to deal with debt maturities in 2017, which presumably gives it some room for maneuver. After the recent debt repurchases, the company's debt consists of $448.7 million of notes and $960 million under the revolving credit facility.

The credit facility has $1.395 billion of total commitments. Approximately $275 million of these commitments mature in May 2018, while the rest matures in May 2019. Notes mature in 2020.

Importantly, the minimum liquidity financial covenant of the credit facility is $150 million. Atwood Oceanics finished the second quarter with $199 million of cash on the balance sheet. Given the fact that the company spent $33 million on repurchasing its bonds through a Dutch Auction, it will probably cease debt repurchases for the time being in order to preserve liquidity.

While the latest fleet status update contained a contract of significant length, this contract starts in 2018. The next year is still looking horrendous from the contracting perspective.

Atwood Osprey has a one-well job and will battle for similar short-term jobs as it has to start working for Woodside Energy in January 2018. Atwood Advantage works for Noble Energy (NYSE:NBL) until August 2017.

Only Atwood Achiever is scheduled to work full 2017 for Kosmos Energy (NYSE:KOS), but the rig has been placed on standby.

The contract for Atwood Achiever is very strong and Kosmos Energy has to pay 95% of the day rate while the rig is not working. Such expenses almost guarantee that the oil producer is trying to find its way out of this unpleasant situation, so risks for the Atwood Achiever might exist.

And this is literally all contract coverage for 2017.

Other rigs have yet to win contracts for the next year. Atwood Oceanics also has a newbuild Atwood Admiral, whose delivery could occur on September 30, 2017, on Atwood's option, but it is clear that the company won't be taking the delivery of the rig.

I'd also bet that Atwood Oceanics won't take the delivery of the other newbuild, Atwood Archer, which is scheduled to be delivered on June 30, 2018.

In my view, the window of opportunity for additional debt repurchases is shut, and Atwood should preserve as much liquidity as it can as next year will likely be extremely tough.

Atwood Oceanics' problems are no secret for market participants and the company's shares are among the most widely shorted in the offshore drilling space.

In fact, only Ocean Rig (NYSE:ORIG) has a bigger short float. From my point of view, the Atwood trade is too crowded and the company's position allows for various interpretations, which is not comfortable for an outright short.

Nevertheless, I'm skeptical that Atwood Oceanics' shares will hold on current levels if oil does not rebound significantly. The second-quarter operating results were good and the stock might experience a bump on the news, but contracting problems are more important.

Debt repurchases are surely a catalyst but this catalyst won't emerge any time soon as the company needs to prepare for the tough 2017.

It is possible that we can see deals similar to the Atwood Osprey deal in the second half of this year. However, these deals are positive for oil producers who lock attractive rates. Debt-laden drillers cannot afford near-breakeven rates in the long run. Ultimately, such rates could lead to debt restructurings.

Atwood's advantage is that the first credit milestone is not due until June 30, 2018, which is almost two years from now, but time runs fast and this distance should not lead to a false sense of security. It is possible that we will see rates for 2018-2019 in 2017 and the outcome will not be positive for the offshore drilling industry.

In my view, Atwood's contracting problems will ultimately be reflected in the price of its shares. Thus, I expect further pressure on the company's stock despite a solid second-quarter report.

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 may trade any of the abovementioned stocks.