Even before oil prices crashed the offshore drilling industry was facing a big problem. There were too many rigs for the amount of work that oil companies were demanding. That situation has grown exponentially worse due to the steep drop in the oil price over the past year and a half, which is making it nearly impossible to justify spending money to drill offshore. That's leading offshore drillers like Atwood Oceanics (NYSE: ATW) to begin to idle rigs once their contracts have expired, which is causing revenue and earnings to sink. That tough operating environment was on full display when the company reported its fiscal first-quarter results on Monday evening: 

Atwood Oceanics results: The raw numbers

Metric

FQ1 2016 Actuals

FQ1 2015 Actuals

Growth (YOY)

Revenue

$307.8 million

$351.7 million

-12.5%

Net income

$39.1 million

$46.2 million

-15.4%

EPS

$0.60

$0.71

-15.5%

Data source: Atwood Oceanics,

What happened with Atwood Oceanics this quarter? 
Atwood Oceanics revenue and earnings sink due to idled rigs:

  • Atwood's revenue slumped 12.5% year over year, though it was toward the top end of its guidance range of $300 million to $310 million. The main culprit was the company's jackup segment where revenue slumped 43.1% after the company idled the Atwood Mako and Atwood Manta.
  • Earnings also slumped, which was partially due to the lost revenue from the jackup vessels as well as weaker revenue and drilling higher costs from its deepwater vessels. This was partially offset by higher revenue and stable drilling costs from ultra-deepwater drillships.
  • There were two other factors impacting Atwood's fiscal first quarter earnings. On the negative side, the company recorded a non-cash impairment charge of $64.7 million, or $1.00 per share, relating to the Atwood Falcon. This was something the company warned last month was a possibility. However, on the positive side the company did receive $18 million, or $0.28 per share, from an insurance recovery relating to cyclone damage to the Atwood Osprey. That was actually higher than the $10 million to $15 million it expected.
  • If these items are adjusted, earnings would have actually been $85.8 million, or $1.32 per share, which was well above its own guidance range of $1.05 to $1.20 per share. Though, still below the year-ago period where Atwood's adjusted earnings, after adjusting for a similar impairment charge, were $115 million, or $1.68 per share.

Looking forward 
Atwood is starting to go over an earnings cliff because it has a growing number of rig contracts expiring in 2016. As the chart on the slide below shows, only two of the company's rigs have a contract currently extending beyond 2016: 

Atwood Oceanics Inc Backlog

Source, Atwood Oceanics. 

This could prove to be a real problem during the second half of 2016 if new contracts are not secured. Adding insult to injury, even if work is secured, the contracts rates are expected to be much lower because so many rigs are facing the same future, which is pushing down dayrates. Needless to say, investors can pretty much bank on the fact that Atwood's earnings and revenue will continue to decline this year. 

Matt DiLallo 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.