"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.
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.
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.
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.
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.
The best way to play offshore drilling?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!