The offshore drilling industry is in the midst of a near perfect storm as weak demand for drilling rigs slammed up against weak oil prices, sending the industry off course. It's a storm that has affected all the major offshore drillers in one way or another. However, Atwood Oceanics Inc. (NYSE:ATW) has experienced the least damage from the storm thanks in part to the fact that most of its rigs were fully contracted and it didn't take on a whole lot of debt to build out its fleet.
All that being said, there's still some nervousness among investors for Atwood's upcoming fiscal second-quarter earnings report given all the negativity within the sector. Here are three things that investors really don't want to see when the company reports results this Wednesday evening.
Last quarter's results were pretty awful on the surface. Atwood reported revenue of $351.7 million, and earnings of $0.71 per share. Neither result pleased Wall Street as revenue was a bit shy of estimates while earnings were less than half of what analysts expected. However, the earnings miss had to do with some non-cash impairment charges the company took in the quarter.
Still, investors don't want to see the company miss estimates again. Instead, they are hoping to see the company report $342.5 million in revenue and earnings of $1.66 per share. Anything less than meeting expectations could cause Atwood's stock to start sinking.
Big storm damage
The storms facing Atwood Oceanincs have been both figurative and literal. Last month, one of its semisubmersible drilling units, the Atwood Osprey, was damaged during a cyclone. While the rig damage was minimal, and is expected to be repaired by the end of this month, the incident will have both short and long-term impacts on Atwood. In the short-term there will likely be some impact on quarterly results as the cyclone hit toward the end of last quarter. This could impact the company's financials in two ways as there will be a loss of revenue as well as repair costs.
So far the rig has been out of service for about 45 days, with 15 of those days coming at the end of last quarter. What investors don't want to see is a deep financial impact from the event, such as insurance not covering some, or all, of the damage or the lost revenue. Such a storm hit would cause concern that the company isn't adequately protected from future storms at sea.
Further degradation to the backlog
While the near-term financial impact from the storm isn't yet known, we do know that the damage to the rig is causing some longer-term damage to Atwood's backlog. This is due to the fact that the event triggered the termination rights of Chevron (NYSE:CVX), which had leased the rig. This enabled Chevron to renegotiate the contract, which resulted in one year being cut from the contract's term. As such, the contract expires in the middle of next year, instead of 2017. This leaves Atwood with having to find a new customer for the contract in the middle of the toughest rig market in years.
This highlights a key fear for investors, as they don't want to see any other rig contracts shortened due to the more figurative storm raging in the offshore drilling sector. Several of Atwood's peers have had rig contracts terminated early or renegotiated at lower dayrates due to weak oil prices. This is not something investors would want to see at Atwood as its backlog is what's backstopping its newbuild program as well as its dividend.
While Atwood Oceanics is in a much stronger position than a lot of its peers, that doesn't mean investors are resting easy right now. The company is facing several headwinds that could impact its results not only in the next two quarters, but in the years ahead. The hope is that the company can ride out the storm with as minimal damage as possible.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Atwood Oceanics and Chevron. The Motley Fool owns shares of Atwood Oceanics. 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.