A vicious storm has been pounding the offshore drilling industry for more than a year after a combination of an oversupply of rigs slammed against weak oil prices. However, despite the impact that has had on offshore drilling activity, it has barely affected Atwood Oceanics (NYSE:ATW). In fact, because of its strong contract backlog and cost reductions, its fiscal fourth-quarter results, which were reported Monday evening, were actually very strong.

Atwood Oceanics results: The raw numbers

Metric

FQ4 2015 Actuals

FQ4 2014 Actuals

Growth (YOY)

Revenue

$363.2 million

$323.4 million

12.3%

Net Income

$150.7 million

$112.2 million

34.3%

Earnings Per Share

$2.32

$1.72

34.9%

Data source: Atwood Oceanics.

What happened with Atwood Oceanics this quarter? 
Atwood Oceanics benefited from strong performance by its ultra-deepwater fleet:

  • Thanks to the addition of that Atwood Achiever to its fleet last year, revenue from its ultra-deepwater drilling fleet is up 43.8% year over year to $197 million. At the same time ultra-deepwater drilling costs are only up 38.1% to $58 million.
  • This offset weaker year-over-year revenue both from its deepwater fleet, which is down 14.1%, and its jackup fleet, which is down 3.9%. Meanwhile, costs in the deepwater segment are down 41.9% year over year while jackup costs were actually up 16.7%.
  • Ultra-deepwater revenue could continue to drive Atwood in the years ahead after the company announced that the Atwood Advantage was awarded an extension and rate adjustment for its existing contract with Noble Energy (NYSE:NBL) and that it had entered into exclusive negotiations for a contract for one of its two newbuild drillships.

What management had to say 
CEO Robert Saltiel, commenting on the company's results on its quarterly conference call, said:

In the fourth quarter, we established new quarterly records for revenue and earnings, due to excellent operations performance and good cost control. In addition, our fiscal year 2015 revenue and earnings also set new company records. Our execution during this downturn continues to be outstanding. The Atwood rig fleet operated at a combined 97% revenue efficiency in the fourth quarter.

There were two factors that Saltiel pointed out that drove Atwood's results this quarter. First, the company contained its costs and, second, its fleet ran at 97% revenue efficiency. This enabled it to capture most of the revenue available to it when revenue is tough to come by, while also maximizing its profit margin by keeping its costs at bay.

He also made an interesting point about its dividend. He said:

When we initiated the dividend last September, our industry outlook and the Atwood share price were both in very different places from where they are today...we do recognize that the opportunity cost of paying a dividend has risen, given potential alternative uses of this cash in today's uncertain market.

While the company hasn't decided to cut the dividend, it does appear that Saltiel is hinting that the dividend could be suspended until industry conditions improve.

Another important area Saltiel detailed on the call was the contract status of Atwood's fleet. He went into some detail on the contract award with Noble Energy, which is to plug and abandon some wells in the Gulf of Mexico. When that work begins next summer, it will be at a lower rate for the four months that it will take to plug Nobel Energy's wells. However, the trade-off was a longer total contract term through August 2017.

Also, he noted that there's finally progress in securing a contract for one of its ultra-deepwater drill rigs currently under construction. It doesn't yet have a final agreement, but the drilling program would be in Brazil and start in the third quarter of 2017.

Finally, the company also noted that it has idled both the Atwood Mako and the Atwood Manta after the expiration of those drilling contracts due to lack of available work.

Looking forward 
According to Saltiel:

There's been little change in our general point of view since the last earnings call. Demand for working floaters has declined by a further 10%... while the number of floaters that have been retired, scrapped, or cold-stacked has only increased by nine. It is fair to say that rig supply attrition has occurred at a slower pace than we would have expected.

In other words, because its rivals are holding on to older rigs longer than anticipated, it is taking longer for the oversupply of drilling rigs to abate, which is putting more pressure on dayrates. This will impact the company next year when it comes to recontracting its fleet, with renewal rates likely to be lower. So, while its fiscal fourth quarter was strong, Atwood could begin to face some of the stiff headwinds from the offshore drilling market next year.