No More Whining Over Atwood

About eight months ago, I went hype hunting, and Atwood Oceanics (NYSE: ATW  ) was my offshore-drilling quarry. The company's valuation looked lofty, even considering that the deepwater dance is lasting a whole lot longer than most anyone anticipated. I got even more skeptical when I discovered that the company's oft-cited rock-bottom PEG ratio was based on the estimate of a single analyst. I also whined about Atwood's iron -- in other words, the quality and capabilities of its rigs.

I've been wrong on Atwood because I've underestimated the earning power of the company's fleet. The Atwood Eagle, Hunter, and Falcon are 5,000-foot rigs, so their depth capability falls just short of industry watcher ODS-Petrodata's deepwater floating-rig category. Still, the dayrates for these units, not to mention the 2000 Atwood Southern Cross semisubmersible, are dynamite, given their subpremium status.

In the company's fiscal first quarter, the fleet generated $111 million in revenue, representing 25% year-over-year growth. With drilling costs only 4% higher, contract drilling margins were able to expand from 45% to 54%. Atwood still has a long way to go to catch margin maestros Noble (NYSE: NE  ) and Ensco (NYSE: ESV  ) , but there is ample room for Atwood to catch up, considering how many of these rigs are set to reprice at higher rates.

For example, the Eagle is currently working for BHP Billiton (NYSE: BHP  ) at $170,000 per day. After May, that figure jumps to $360,000 per day for a one-well Eni (NYSE: E  ) job. Next, it's $405,000 per day for two years with Woodside Petroleum, and finally, it'll be somewhere in the mid-$400,000 range for Chevron (NYSE: CVX  ) on into early 2011, when the newly contracted semi arrives.

This is an example of the booming backlog that a company like Transocean (NYSE: RIG  ) tends to brag about. But the real key to Atwood is that since most of its rigs are not booked up very much beyond 2008, the possibility exists of rolling up ever-higher contracts, as long as the market holds up. The Hunter, for one, is booked up only through August, and based on today's market, that rig's rate could more or less double. If your crystal ball tells you that leading-edge rates won't lose their luster, Atwood may just be the driller of your dreams.

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