Better Buy: Seadrill Limited vs. Atwood Oceanics, Inc.

The offshore drilling market has been going through a brutal downturn, which puts tremendous pressure on drilling contractors Seadrill (SDRL) and Atwood Oceanics (ATW). Unfortunately, there are few signs on the horizon that the market will improve anytime soon, which means the pressure will remain on these two companies. Because of that, investors considering an offshore driller need to make sure it has the financial capacity to survive until conditions improve. Here's how these two stack up.

Drilling down into the financial situation

Seadrill and Atwood Oceanics are both very mindful of the importance of shoring up their balance sheets to ensure they can stay afloat until conditions improve. Here's a look under the hood at their current financial situations:

Data source: Atwood Oceanics and Seadrill Limited.

While Atwood Oceanics has a weaker credit rating, its financial situation has improved dramatically over the past year. Through the early part of last year, the company took advantage of market worries to buy back $201 million of face value debt at a $67 million discount. Meanwhile, last December the company was able to secure a deal to push back the remaining milestone payments on its two newbuild ultra-deepwater drillships until December of 2022. Finally, earlier this year the company sold $181 million of common stock to bolster its balance sheet. As a result, it has more than enough liquidity to last at least until May of 2019, which is when its next tranche of debt matures. The company believes that will be sufficient time for the offshore drilling market to start showing signs of improvement so it can refinance that debt.

Seadrill, on the other hand, has spent the past year working on a comprehensive restructuring to shore up its financial condition. However, that process has taken much longer than the company had hoped because its financial situation is so complex. Not only does the company have $8.2 billion in secured debt, but it has another $2.3 billion of unsecured debt and $3.5 billion of contingent liabilities due to the company's guarantee of the debt at affiliates like Seadrill Partners (SDLP) as well as its newbuild drillship fleet. While the company doesn't yet have a restructuring plan in place, it stated earlier this year that it hopes to raise $1 billion in new capital, extend debt maturities, reduce fixed amortization, and amend its financial covenants to give it more breathing room. Seadrill would like to come to an agreement on a deal before its next debt maturity at the end of April, though given its past delays, there is no guarantee it will reach a deal by that deadline.  

Image source: Getty Images.

A look at the backlog

One thing that has kept both companies afloat during the downturn and bought them time to address their financial situations is the strength of their contract backlogs. During the third quarter, for example, Seadrill's backlog helped keep its revenue from sinking too deeply, though sales in the third quarter did still drop 25% year over year to $743 million. Unfortunately, that backlog is starting to run low because the company restructured contracts at lower rates or they expired. In fact, Seadrill has just $3 billion of revenue remaining in its backlog, with roughly $2 billion of that representing contract work for 2017. Because of that, earnings and cash flow will continue to fall significantly unless drilling activity rebounds sharply.

Atwood's contract backlog isn't that much better. That's clear from its most recent quarterly results when revenue from its deepwater fleet completely evaporated while jackup revenue also fell sharply as a result of several contract expirations. Overall, revenue last quarter was down nearly 50% from the year-ago quarter. While the company recently won some new short-term contracts, it has few contracts that run beyond this year at the moment. 

Investor takeaway

Neither company has a solid balance sheet, and both will burn through the bulk of their backlog this year, which could continue to weigh on their stock prices. That said, Atwood does have one significant advantage over Seadrill right now, which is time. Because it proactively paid down debt, raised capital, and pushed back shipyard payments it has more than enough liquidity to last it the next two years. As a result, it stands a better chance at making it through the downturn, which in my opinion, makes it a better buy over Seadrill.