Contradictory Statements From Atwood Management

| About: Atwood Oceanics (ATW)
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Summary

Atwood Oceanics management has been one of the more positive management teams regarding the industry outlook.

Latest earnings call, however, included several statements that seemed contradictory to previous statements.

This article discusses two examples.

Atwood Oceanics (NYSE:ATW) is an offshore driller with a relatively younger and higher specification fleet, which may serve it well as the offshore drilling industry recovers through the rest of the decade and beyond. If it does in time.

Throughout 2016, the company improved its liquidity and balance sheets by taking the following steps:

  • In March 2016, the company amended its revolving credit facility to address covenant risks;
  • In 1H16, it purchased $201 million face value of its bonds at a $67 million discount;
  • In December 2016, it delayed delivery dates for its two newbuild rigs (Atwood Admiral and Atwood Archer), and financed $250 million at 5% through December 2022.

The reason why the company is laser-focused on liquidity is that its revolving credit facility, which currently has $850m outstanding, matures in May 2019. In addition, $450m of its bonds mature in 2020.

This would not normally pose a problem for the company if management's expectations of rebalancing floater supply and demand had progressed as previously expected. Management made the following statement during the fiscal 3Q16 earnings call on August 2, 2016, when Brent prices had been ranging between $45 and $50 per barrel.

Our longer term perspective on the floater segment is that industry rebalancing of supply and demand may happen sooner than many people think. The positive trend of accelerating floater rig attrition is obviously a key requirement for a recovery in utilization in day rates. Based on our internal analysis, we would not be surprised to see a further 60 or more floaters taken out of the marketed supply stack over the next year.

Of course, a sustained recovery depends on the stabilization of floater demand followed by an upward trajectory. Even though the number of floaters under contract has continued to decline, we believe that floater demand will reach its trough sometime in the first quarter of 2017. Increasing floater demand will, of course, depend on oil price levels, and we continue to believe that oil prices in the mid to high-$50s or low-$60 range are required to stimulate demand meaningfully.

Emphasis added.

Please note that this statement was made before the OPEC and non-OPEC agreement to cut substantial oil supply, which caused oil prices to rise significantly. More importantly, the supply agreement put a "floor" under oil prices, which may further increase confidence in deepwater projects which are longer term in nature.

Readers should compare the statement above to the statement below, made during the latest earnings call, on February 6, 2017:

... we've been saying pretty consistently that for us to have meaningful recovery, we needed to see north of $60 oil.

The recent slowdown in rig attrition, as measured by coldstacking and scrapping of floaters and jackups, is both puzzling and worrying. Our industry will not experience meaningful recovery without better alignment of supply and demand, and with demand still falling and idle rig counts rising, we have expected a much stronger supply response.

Please note that Brent prices had ranged between $55 and $57 during the preceding two months when management adjusted its estimate of the oil price needed to stimulate demand.

Perhaps in line with the change in tone, Atwood recently signed a contract for its ultra-deepwater semisubmersible Atwood Condor at a very low dayrate of $222,295 per day. I estimate that this dayrate is near cash breakeven cost per day.

This is not surprising given the demand and supply imbalance in the market at this time, but what was surprising about it is that the company locked up its floater for 18 months from January 2018 through mid-2019 at this very low dayrate.

This action does not align with the comment "we believe that floater demand will reach its trough sometime in the first quarter of 2017" made during the fiscal 3Q16 earnings call, cited above.

Bottom Line: The combination of significant debt maturing in mid-2019 and near cash-breakeven contracts that lock up rigs until then can be very toxic for the company. In addition, the abrupt change in management's tone and the estimate of oil price needed for recovery, closely following a secondary equity raise, is not comforting to investors.

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.