How Deep Is Atwood Oceanics?

Because the September quarter marks the end of Atwood Oceanics' (NYSE: ATW) fiscal year, we're hearing the driller's results a bit later than the rest of the deepwater denizens'. While it may be late to the party, Atwood's results are certainly fashionable, at least on the surface.

Revenue clocked in 46% higher for the year, thanks to greater dayrates across the entire fleet. Contract drilling costs spiraled up 29%, in no small part because of a rig that was out of commission for much of 2006. Shareholders might wish this rig, the Seahawk, had never come back into service -- it lost money in 2007, and management forecasts another slight loss in 2008. Overall, though, the international offshore drilling market was strong enough to lift earnings per share by nearly 60%.

While they've steadily risen over the last several years, Atwood's contract drilling margins remain unimpressive. Even excluding Seahawk, which I see no reason to do, the firm only managed a 57% drilling margin for 2007. While that's about on par with pre-merger Transocean (NYSE: RIG), Atwood's definitely not getting invited to the next meeting of the Ensco International (NYSE: ESV) Cost Maven Club.

I also find it hard to get excited about Atwood's fleet. The firm's big-swinging drills are three 5,000-foot semisubmersibles, constructed in the early 1980s. That water depth won't cut it in the world's ultra-deep basins, whose strong prospects have led rivals like Transocean and Noble Corp (NYSE: NE) to order up multiple 12,000-foot rigs.

A glance at Motley Fool CAPS tells me that hundreds of you disagree with me. This may partly be due to the 67% five-year annual growth forecast listed on Yahoo! (Nasdaq: YHOO) Finance. Data provider CapitalIQ tells me this figure is based on one analyst's estimate, so please take that figure, and the tantalizing PEG ratio it has spawned, with a mine's worth of salt.

Finally, if you're simply dying to get a piece of this business -- and it is a great, albeit pricey, business -- maybe you'll consider the following backdoor purchase. Helmerich & Payne (NYSE: HP) owns about 13% of Atwood's shares. So if you buy H&P, whose remarkable maneuvers make it the lord of the land drillers, you also get a cheaper chunk of Atwood.