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Ernie Park

ATW AT A GLANCE

P/E ► 6.98 AVG EV/EBITDA ► 6.52 AVG ROA ► 22.9% HIGH ROE ► 30.5% AVG Debt to Equity ► 0.335 LOW Current Ratio ► 3.42 HIGH Interest Coverage Ratio ► 171 HIGH

 

 

 

 

 

 

Atwood Oceanics, Inc. (NYSE: ATW) is an international offshore drilling company with eight rigs (4 semi-submersible, 2 jack-up, 1 semi-submersible tender assist, 1 submersible). ^[1] Atwood earned $403M in FY 2007 by contracting its rigs to oil companies such as Noble Energy (NBL). ^[2]

With crude oil prices hovering around $120 per barrel in 2008, there is increased demand in the offshore drilling industry which has driven up prices, in turn supporting a 228% increase in Atwood's revenues from FY 2005 through FY 2007. ^[3][2] Despite such strong growth, Atwood pales in comparison to companies like Transocean (RIG) and Diamond Offshore Drilling (DO) who operate many more rigs - rigs that can drill in deeper waters and more difficult reserves. However, Atwood does have orders in place for two new semi-submersibles that will let it compete in deeper waters and lessen its reliance on a very limited client base. ^[4]

In addition to new rigs, Atwood will need new contracts reflecting the high price of crude oil to maintain growth; on June 24, 2008, one of Atwood's semi-submersibles, the Hunter, was awarded a contract that more than doubled its former dayrate. ^[5] Two more of Atwood's semi-submersibles will be open to receive new contracts in 2009 and 2011 and another is under contract for a dayrate of $406,000. ^[6]

Company Overview

Atwood Oceanics is awarded contracts, through a competitive bidding process, in which it rents its offshore drilling rigs out to oil & gas drilling & exploration companies for a set rate. To increase operating margins, ATW must maximize the number of days its rigs are on contract (utilization rate); from FY 2005 to 2007, ATW had rig utilizations of 98%, 100%, and 100%, respectively (disregarding upgrade downtime). ^[7]

An investment of $400M on upgrades to the rigs since FY 1997 has kept the fleet modern and usable. ^[1] However, compared to competitors such as Noble (NE) and Transocean (RIG) who have over 50 and 135 rigs, respectively, ATW has a small fleet. ^[8][9] Therefore, Atwood still has significantly fewer rigs under contract compared to its competitors, despite its near perfect utilization rates, keeping its overall revenue lower.

Since FY 2005, 93% of ATW's revenues came from foreign operations. Of its eight rigs, only the Atwood Richmond, which is located in the Gulf of Mexico, is not located in international waters. ^[1] As of July 8, 2008, Atwood's other rigs were located in shores off of Australia, Italy, Thailand, Mauritania, Equatorial Guinea, India, and Malaysia with future contracts moving rigs to the Mediterranean Sea and Ghana. ^[10] However, due to the nature of the industry, Atwood could be in any international waters its future contracts take it to.

Business by Rigs

% of Revenue by Rig Type, FY 2007 ^[11]

Atwood operates eight rigs of four different types.

• Semi-Submersible (SS) (63% of FY 2007 revenue^[12]) rigs are designed for the deepest waters and are more expensive to operate than jack-ups. The Atwood Eagle, Atwood Hunter, Atwood Southern Cross, and Atwood Falcon are all SS and earned $256.6M in FY 2007. ^[12]
• Semi-Submersible Tender Assist (SSTA) (8%^[12]) rigs are the same as semi-submersibles except the equipment is installed on permanent offshore platforms. The Seahawk is Atwood's SSTA and it attributed to $30.6M in revenue in FY 2007. ^[12]
• Jack-up (JU) (20%^[12]) rigs are lowered into the water and then jacked up to the surface. They cannot operate in waters as deep as semi-submersibles can since they are limited by the legs of the rig. Atwood's two jack-ups, the Atwood Beacon and Vicksburg, contributed to $79.8M in revenue in FY 2007. ^[12]
• Submersible (S) (7%^[12]) rigs rest on the sea floor and are meant to operate in shallow water depths from 9 to 70 feet. Atwood's lone submersible, the Richmond, earned $29.5M in FY 2007. ^[12]

Semi-Submersible Contracts

Atwood's four semi-submersibles generated 63% of its $403M in FY 2007 and those contracts are subsequently the most important to Atwood's business. ^[11]

• On June 24, ATW was awarded contracts for the Atwood Hunter by Noble Energy (NBL) (not to be confused with Noble (NE)) for four years. The dayrates are tentatively set at $511,000, $538,000, and $545,000 for work in the Mediterranean Sea, Ghana, and other West African locations, respectively. ^[5] This will be a drastic improvement compared to the Hunter's current $240,000 dayrate. ^[10]
• In 12 months, the Atwood Falcon will no longer be tied to its $160-$200K dayrate and will be open to new contracts.^[13]
• The Atwood Eagle is contracted until 2011 with dayrates varying from $170,000 to $450,000. ^[10]
• The Atwood Southern Cross was contracted in February 2008 by ENI S.p.A. (E) for an operating dayrate of $460,000 for up to 240 days. ^[6]

Trends and Forces

Rising Oil and Gas Prices Drive Exploration

Since 2003, the price of a barrel of crude oil has risen from $33 to over $120 (adjusted for inflation). ^[3] Increased demand and prices encourage oil companies such as ChevronTexaco (CVX) and Noble Energy (NBL) to drill more which benefits Atwood and other drillers; mirroring the jump in crude oil prices, ATW has seen a 277% increase in revenue from $145M to $403M ^[2]. In addition, the minimal creation of new rigs worldwide has driven up dayrates in conjunction with high demand for rigs (over 93% of semi-submersibles and jack-ups were under contract in 2007). ^[14] All of Atwood's eight rigs operated under higher dayrates in FY 2007 than in FY 2006 for a growth of $126.4M. ^[11]

Deepwater Oil Exploration is the Hot New Technology for Oilfield Services Companies - and Atwood isn't Yet in the Game

Extreme oil prices also make deep-water drilling economically feasible for the major oil companies.^[15] Atwood cannot fully capitalize on this as its fleet's biggest semi-submersibles (Atwood Eagle, Hunter, Falcon, Southern Cross) only drill to 5,000 feet while strong competitors such as Transocean (RIG) and Noble (NE) can tap into deep basins with 12,000 foot rigs. ^[16] However, Atwood does have orders in place with Jurong Shipyard for two semi-submersibles with at least one being able to reach 10,000 feet. ^[4]

Over-Reliance on a Small Number of Customers

Since Atwood has only eight rigs, it relies heavily on a small number of customers. In FY 2007, Woodside Energy Ltd., BHP Billiton (BHP) and Sarawak Shell Bhd. accounted for 43% of Atwood's revenue. ^[17] The loss of a single contract has a much greater impact on Atwood compared to its competitors with more customers and rigs.

Strong Storms and Dangerous Weather Conditions Can Damage Rigs

Offshore drilling rigs are exposed to the extreme weather conditions in the world's oceans. Atwood's rigs operate in many offshore areas by Australia, India, Africa, and elsewhere. With only eight rigs, the possibility of just one being damaged or delayed in its drilling makes the weather a powerful variable. In the Gulf of Mexico however, where the hurricane season is notoriously bad, Atwood only operates the Richmond which accounted for 7% of its FY 2007 revenue. ^[11] Although Hurricane Katrina in 2005 did not inflict major damage on the Richmond, competitors such as Diamond Offshore Drilling (DO), who have eight semi-submersibles located in the Gulf of Mexico^[18], suffered damage to two of them. ^[19] The monsoon season in India is also notorious for its powerful winds and rains. A particularly bad storm has the potential to hinder drilling operations there. Since Atwood's operations take them to all different international waters, all different types of weather extremes are factors.

Competition & Market Share

Atwood competes with several other offshore drilling companies for contracts. Due to its small fleet, ATW is dwarfed by its competitors in rig quantity and revenue. Atwood's main competitors include:

• Transocean (RIG) is the largest company in the offshore drilling market with 139 rigs (jackups, semi-submersibles, drillships) as of February of 2008. ^[9] Acquiring GlobalSantaFe in November 2007 added 59 rigs to RIG's fleet and supported a jump in quarterly sales from $1.33B in Q1 of FY 2007 to $3.11B in Q1 of FY 2008. ^[20]
• Diamond Offshore Drilling (DO) operates 44 rigs (30 semi-submersibles, 13 jack-ups, 1 drillship) with 2 more jack-ups under construction. ^[18]
• Pride International (PDE) maintains 64 offshore rigs internationally (2 deepwater drillships, 12 semi-submersibles, 28 jackups, 10 platform rigs, 5 managed deepwater drilling rigs, 7 Eastern Hemisphere-based land drilling rigs). ^[21]
• Noble (NE) operates 62 rigs worldwide (13 semi-submersibles, 3 drillships, 43 jackups, 3 submersibles). ^[22]

High dayrates and fleet utilization are key metrics in the offshore drilling industry. Dayrates specify the cost of companies to rent rigs while fleet utilization is the percentage of all rigs under contract.

Atwood had 1.3% of the offshore drilling industry's market share in terms of number of active rigs on August 1, 2008 (8 of 613). ^[32]

Market Share of Active Offshore Rigs ^[32]

References

1. ↑ ^{1.0 1.1 1.2} ATW 10-K 2007, "Business", Page 3
2. ↑ ^{2.0 2.1 2.2 2.3 2.4} Morningstar Financial Data: ATW
3. ↑ ^{3.0 3.1} Forbes: Crude Oil Prices 1861-2008
4. ↑ ^{4.0 4.1} Your Shipbuilding News, "Sembcorp marine's Jurong Shipyard secures 2nd rig order from Atwood Oceanics Pacific Limited to build deepwater semi-submersible"
5. ↑ ^{5.0 5.1} Yahoo! Finance: Atwood Announces Contracts for Atwood Hunter
6. ↑ ^{6.0 6.1} ADVFN News: Atwood Announces Earnings and Contract for Southern Cross
7. ↑ ATW 10-K 2007, "Drilling Contracts", Page 4
8. ↑ NBL 10-K 2007, "Drilling Fleet Table", Page 15
9. ↑ ^{9.0 9.1} RIG 10-K 2007, "Drilling Fleet", Page 6
10. ↑ ^{10.0 10.1 10.2} ATW Fleet Contract Status
11. ↑ ^{11.0 11.1 11.2 11.3 11.4} ATW 2007 Annual Report to Shareholders, Page 9
12. ↑ ^{12.0 12.1 12.2 12.3 12.4 12.5 12.6 12.7} ATW 2007 Annual Report to Shareholders, "Results of Operations", Page 11
13. ↑ Seeking Alpha: New Contracts Buffers Atwood Oceanic
14. ↑ Seeking Alpha: Schlumberger Q4 2007 Earnings Call Transcript
15. ↑ BloggingStocks: Exploding Demand in Offshore Drilling
16. ↑ The Motley Fool: How Deep is Atwood Oceanics?
17. ↑ ATW 10-K 2007, "Risk Factors", Page 13
18. ↑ ^{18.0 18.1} DO 10-K 2007, "Business", Page 3
19. ↑ HSBC: Hurricanes Katrina and Rita
20. ↑ BloggingStocks: Transocean (RIG) Profit More than Doubles in First Quarter
21. ↑ Reuters: Pride International Inc.
22. ↑ NE 10-K 2007, "Business", Page 1
23. ↑ ATW 2007 Annual Report to Shareholders (Average of Dayrates for all 8 Rigs)
24. ↑ NE 10-K 2007, "Rig Utilization, Operating Days, and Average Dayrates", Page 25
25. ↑ NE 10-K 2007, "Consolidated Statements of Income", Page 43
26. ↑ RIG 10-K 2007, "Results of Operations", Page 46
27. ↑ RIG 10-k 2007, "Consolidated Statements of Operations", Page 63
28. ↑ DO 10-K 2007, "Selected Financial Data", Page 19
29. ↑ DO 10-K 2007, "Operating Income", Page 29
30. ↑ PDE 10-K 2007, "Segment Review", Page 34
31. ↑ Google Finance: PDE
32. ↑ ^{32.0 32.1} RigZone Offshore Rig Fleet by Manager