So what: Shares of Atwood Oceanics have been on quite a run, rallying 92% off its bottom in late January. Fueling it was a bolstered balance sheet. Not only did the company amend its credit facility in late March, but it recently announced that it was retiring some of its debt. In fact, it has been very aggressive on debt repurchases, having retired $154 million, or 24% of its outstanding senior notes, at a 36% discount.
That being said, Jefferies does not see any more catalysts on the horizon, which is why it downgraded the stock from buy to hold. It now sees the stock as fairly valued at around $12 per share. Furthermore, it has some concerns about the company's ability to find new contracts for vessels going off lease later this year, which it expects to weigh on the stock going forward.
That contract risk was something Atwood CEO Robert Saltiel discussed on the most recent conference call, noting that while the company was "working on potential opportunities for most of our active rigs, most of these are blend-and-extend deals with existing clients." These deals are becoming more common in the sector with rival Ensco (VAL) recently detailing two such deals it made with a customer. What Ensco did was agree to extend the terms of these rigs, with one now running through Dec. 2019 and the other through June 2018, while also agreeing to a significant cut in dayrate. That said, the net result was that Ensco's backlog dropped by $140 million. So, while it's keeping its vessels active, Ensco won't be making as much money to do so. That same approach appears to be Atwood Oceanics' best hope to keep its rigs running during the downturn.
Now what: With the catalysts played out, Jefferies is calling it a win and cashing in on its bullish call on Atwood Oceanics. It just doesn't see another positive catalyst on the horizon given that the offshore drilling sector is still under a lot of pressure from weak oil prices. Because of that weakness, Atwood Oceanics will likely need to take much lower dayrates to keep its rigs working, which isn't enough fuel to keep the rally going.