Is Atwood Oceanics Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Atwood Oceanics (ATW) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Atwood Oceanics' story, and we'll be grading the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Atwood Oceanics' key statistics:

ATW Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q1 2011.

ATW Return on Equity (TTM) data by YCharts

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Atwood Oceanics has earned one more passing grade this year than it did in its initial assessment last year, finishing with three of seven passing grades due to stronger EPS growth and a drop in share prices over the past year. Atwood's top and bottom lines both look better than they did a year ago, and its years-long hemorrhaging of cash seems to be moderating somewhat -- although it's certainly starting to look a bit riskier lately in light of the company's weaker share performance. What will it take for Atwood to finally reverse this free-cash-flow crash and put together a much stronger showing next year? Let's dig a little deeper to find out.

Atwood isn't the only offshore rig operator to have a lousy year, but it's far from the worst performer. In fact, out of all diversified rig operators assessed by Fool energy specialist Tyler Crowe, Atwood's year-to-date share performance is almost exactly in the middle of the pack:

ATW Total Return Price data by YCharts

Only Vantage Drilling (NYSEMKT: VTG) has put together a year of gains (so far), and it's by far the smallest operator of the bunch, with its fleet of four jackup rigs dwarfed by Atwood's 16 rigs -- and Atwood is the second-smallest operator here! The two other better performers on this list, Seadrill (SDRL) and Ensco (VAL), are succeeding primarily because, as Fool energy specialist Casey Hoerth points out, they have younger fleets and more deepwater rigs, but Ensco succeeds also by being less leveraged and offering a more stable dividend payout. Vantage's fleet may be small, but it's also very young and very capable -- no other deepwater rig operator goes as deep as Vantage's four rigs do, on average.

With all this in mind, what's really keeping Atwood from better performance? Most of its fleet is comprised of floating rigs, and Tyler Crowe has pointed out that its floating rigs lean toward the older side -- Seadrill's average floater is a third as old as the average Atwood floater, and a number of other operators also boast floating rigs that would barely be old enough for preschool. That holds its dayrates, and thus its potential revenue, below that of companies operating younger and more in-demand rigs.

More recently, Atwood has been hurt by delays in delivering new rigs and a growing glut of rigs available, but management believes that these problems will be overcome next year. In fact, the company's fleet age has already fallen significantly over the past few years. Now that it's paused on its formerly aggressive rig buildout effort, Atwood should become cash-flow positive next year, which will go a long way toward improving its score and making this deepwater operator a more attractive investment in a field of low-priced but high-yielding alternatives.

Putting the pieces together
Today, Atwood Oceanics has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.