Atwood Oceanics Inc Has the Best of Both Worlds

"Small is beautiful." That business truism can be equally applied to offshore rig leasing. Sure, size often brings safety, but the best operators are often the smaller, nimbler names. In the offshore rig leasing industry, Atwood Oceanics (NYSE: ATW  ) is a name you should know. 

In an environment where many believe that rigs will soon be idled, Atwood stands out like a beacon on high ground. The company has a reasonable debt level, most of its revenue is safely contracted through 2015, and the company has a young deepwater fleet and some very high margins. As you will see, Atwood really is the best of both worlds.

Best of both worlds
In the offshore rig leasing industry, retail investors seem to acknowledge two 'best of breed' companies, each with a different approach: Seadrill (NYSE: SDRL  ) (NYSE: SDRL  ) (NYSE: SDRL  ) pays a high dividend and has contracted out most of its very young, deepwater fleet. But it also has no spare cash flow and a very high debt load. Ensco (NYSE: ESV  ) (NYSE: ESV  ) (NYSE: ESV  ) (NYSE: ESV  ) (NYSE: ESV  ) , on the other hand, pays less of a dividend and has relatively few new build rigs contracted. However, Ensco's debt load is reasonable, and its dividend is well protected by ample cash flow. 

A $3 billion company, Atwood is much smaller than either Ensco or Seadrill. Atwood's debt structure is similar to that of Ensco, but Atwood's revenue is safely contracted like Seadrill's. Atwood's fleet is a bit older than Seadrill's and Enscos's, but that will change over the course of this year as Atwood completes another brand new ship.

Source: Investor relations.

A quick look at net income margins shows that Atwood is indeed a cut above the large-cap 'best-of-breeds,' at least in terms of profitability. Note also that Ensco and Seadrill have the highest margins of the big names. That, too, is not an accident. Not listed on this chart, Atwood's estimated 12% return on capital is right in the top tier of its peer group.

Data from Morningstar.

Debt, which is another big concern for retail investors, is well in check at Atwood Oceanics. Atwood's debt to operational cash flow is about the same as Ensco's, and Ensco's balance sheet is the most conservative of the big lessors. 

Source: Atwood Investor relations.

But unlike Ensco, Atwood has securely contracted out its revenue for both this year and next. At a more granular level, all but one ship of Atwood's existing fleet of twelve are contracted through 2014, and all but five of thirteen are contracted through 2015. 

Here is where the rubber meets the road. During 2013, most offshore lessors have lowered earnings estimates at least once, while Atwood has remained largely above the fray. Such is the result of having a young, deepwater fleet, the likes of which producers most want to lease. This is a 'bifurcated' market, in which upstream companies require the safest, most efficient rigs. Atwood has just that, and so the company has been able to lock in revenue and spare itself from any declines. 

Bottom line
Atwood is a small company and it doesn't yet pay a dividend. However, the company's revenue visibility and high margins are the product of a young, deepwater-oriented fleet. Atwood is better positioned than any of its offshore lessor peers to weather what many see as a coming storm.

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  • Report this Comment On April 21, 2014, at 9:22 AM, dab007 wrote:

    atw has a 34% profit margin which is real good but sdrl has 53 % profit margin

  • Report this Comment On April 21, 2014, at 5:31 PM, mtl11041994 wrote:

    The reason SDRL has such a reported high profit margin is because they sold numerous aging rigs which were valued at over 1 billion. If you look carefully, you see that their profit margin is actually higher than their operating margin, which makes no sense.

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