Shares of Atwood Oceanics (NYSE: ATW ) , a mid-cap offshore rig lessor, were down by almost 5% after an earnings report on Tuesday spooked investors. Offshore rig lessors have been trending down as a group for the last few months on fears of oversupply. With its share price down nearly 10% on the year, Atwood is no exception to this trend.
In the wake of last Tuesday's earnings report, investors were disheartened by a few developments:
- A couple slight delays in delivering rigs. The Atwood Advantage, Atwood's newest-built ultra deepwater floater rig, faced delays due to minor technical issues in some pieces of equipment. Instead of keeping the Advantage in the South Korean shipyard, Atwood and the operator elected to move the ship to its Gulf of Mexico assignment and have specialists work on the equipment there. This was a costly fix, but the issues have been worked out. Revenue efficiency on the Advantage was lower as a result of these delays.
- In addition to the Advantage, the launch of the Atwood Achiever will be delayed until August.
- Perhaps most importantly, management reaffirmed that it would be "taking a pause" after the completion of its two ultra deepwater rigs currently under construction, the Atwood Admiral and the Atwood Archer. Management is 'pausing' its new build program in order to see which direction the market goes over 2014.
- Finally, Atwood is in discussion to contract the Atwood Hunter, a stationary jack-up rig, whose existing contract comes with a dayrate of $515,000 per day. Management affirmed that the Hunter's future dayrate would be "lower than that."
While the market for offshore rigs may be tipping in favor of the buyers, the overall situation is a bit more complicated. Since the Macondo disaster in 2010, offshore operators are demanding state-of-the-art rigs that offer higher safety standards. In addition, operators are going further and further offshore, and are therefore increasingly demanding deepwater and ultra deepwater floaters.
All this means one thing: The operators with the youngest and most deepwater-oriented fleets will fare the best in this market. Atwood's fleet is among the youngest in the industry, and all of its recent newbuilds have been for deepwater or ultra-deepwater operations.
Atwood can weather the storm
While the news from last quarter's earnings report was certainly not great, Atwood is more than capable of weathering these difficulties. Consider the following:
- Most of Atwood's rigs are contracted into 2015 and 2016, when conditions may be significantly better.
- Atwood's newest rigs represent a new generation of drill ships. Management firmly believes that the Advantage, Archer, Admiral and Achiever will be the gold standard of the industry and that operators will be eager to lease out these state-of-the-art rigs.
- Atwood will be cash flow positive in 2015. This means the company will be able to pay down debt or make acquisitions if dayrates decline to the point that other lessors become willing to sell at 'firesale' prices. This is exactly the kind of company one wants to have amid a downturn.
Atwood is a great company that can surely weather the storm of lower dayrates. With a young, deepwater-oriented fleet, Atwood should have a competitive advantage in the new post-Macondo reality in which offshore drilling operates. In addition, Atwood will be cash flow positive and has plenty of excess borrowing capacity. The company's secure cash flow will ensure this business 'stays afloat' if dayrates do indeed drop sharply.
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