Atwood Oceanics Inc Has the Best of Both Worlds

Most retail investors consider either Ensco or Seadrill to be the 'best of breed' offshore rig lessor. However, when looking at smaller companies, we find a few with the same strengths and less of the weakness of either Ensco or Seadrill.

Apr 21, 2014 at 8:55AM

"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.

Atw Nim

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.

Atw Debtocf Comp

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. 

Atw Contracted Cf

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. 

Atw

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.

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!

Casey Hoerth has no position in any stocks mentioned. The Motley Fool recommends Atwood Oceanics and Seadrill. The Motley Fool owns shares of Atwood Oceanics and Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers