What: Shares of deepwater drilling specialist Atwood Oceanics, Inc. (NYSE:ATW) are down more than 14% as of this writing on Nov. 11. Just yesterday, Atwood's stock was up 10% after reporting much better than expected revenues and strong earnings for its third quarter.
So what: What a difference a day makes, at least in the eyes of Mr. Market. While yesterday's surprise earnings performance got traders all hot and bothered, today's 3% drop in oil prices was like a cold shower on the passions of the market. The fact remains that offshore oil production is in a serious state of flux due to cheap oil and plenty of growth in cheaper-to-produce onshore resources in recent years, the key driver in the more-than-halving of oil prices over the past 18 months.
As fellow Fool Matt DiLallo wrote just yesterday, cost containment is the name of the game for offshore drillers. Industry giant Transocean Ltd. (NYSE:RIG) also recently reported better-than-expected quarterly revenue and earnings, but it's Transocean's 33% reduction in operating expenses that signals where companies are focused.
After all, the revenue they are producing today is a product of contracts signed back when oil was $100 per barrel, and those contracts are much more scarce with sub-$50 oil, and they pay much lower rates. The big drop in Atwood's stock today, as well as the nearly 5% drop in Transocean's shares, is a reminder of the stark outlook for offshore drillers next year and potentially beyond.
Now what: Atwood is a smaller player in the industry, and also more specialized with a fleet of newer and more capable drilling vessels that can operate in very deep water and harsh conditions. However, the company's backlog has weakened along with most of the industry's, leaving it exposed to uncertainty in the weak demand environment that cheap oil has caused.
In other words, don't mistake today's 14% drop as "sound and fury, signifying nothing," to quote the Bard. Yes, it's short-term trading and thinking driving the volatility, but there's big underlying risk for the entire offshore drilling industry for the foreseeable future.
Jason Hall has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.