The Case for Atwood Oceanics Inc. (ATW)
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Atwood Oceanics is an offshore drilling company that owns and operates 9 rigs. As of January 21, 2011 its stock price was $37.85 per share with a market capitalization of $2.44 billion. The company has a contract backlog of $1.24 billion through fiscal year 2014 with 88% of available operating days committed through fiscal year 2011. Analysts see higher oil prices fueling increased exploration spending by oil companies which would drive demand for Atwood's rigs and utilization rates. Near term catalysts that could push the stock higher include existing contracts with large oil companies and delivery of new ultra-deepwater rigs under construction.
The Case for Atwood Oceanics Inc. (ATW)
- 2. Ticker > ATW Stock Price > $37.85 as of 1.21.11 Shares Outstanding > 64,470,000 Market Cap > 2.44 Billion Source: Yahoo finance
- 3. Atwood was incorporated in 1968 Their purpose was to: ? engage in contract drilling of exploratory and development oil and gas wells in offshore areas ? related support, management and consulting services Source: ATWD.com (Atwood Oceanics website)
- 4. Atwood’s vision: ? Being a Safety, Health, Environmental and Security leader ? Having outstanding rig and employee performance ? Being the number one choice of clients ? Increasing profitability and share price Source: ATWD.com (Atwood Oceanics website)
- 6. Robert J. Saltiel CEO: I'd also like to comment on Atwood's 2010 safety performance. It was simply the best in our Company's 42-year history. We concluded fiscal year 2010 with a total recordable incident rate, which is the industry benchmark measure for injury frequency, of less than 0.8 incidents per 200,000 man hours. This represents 13% improvement over Atwood's 2009 results and most importantly enabled us to avoid any fatalities or debilitating injuries on any of our rigs Source: Q4 2010 Earnings Call Transcript
- 8. What is the size and composition of the Rig Fleet? More importantly what is their Rig Utilization Rate, since Atwood gets paid on a per day usage basis?
- 9. ATWOOD FALCON ATWOOD HUNTER ATWOOD EAGLE ATWOOD OSPREY Source: 10K FY2010, Q1 FY2011; **Please use your zoom function to review the following rig fleet and contract status data
- 10. Rig Name Rated Water Depth Location Customer Estimated Contract End time Estimated Contract Day Rate Additional comments ULTRA-DEEPWATER Under construction in Korea with delivery expected in the fourth ATWOOD ADVANTAGE 12,000' quarter of fiscal year 2013. --- Available N/A Under construction in Singapore with delivery expected in the third ATWOOD CONDOR 10,000' quarter of fiscal year 2012 --- Available N/A FIRM WORK – Second quarter fiscal Under construction in Singapore year 2014 if three-year commitment or with delivery expected in the second quarter fiscal year 2017 if six- second quarter of fiscal year 2011 year commitment. (Contract provides Day rate subject to change due to cost at which time the rig will be CHEVRON AUSTRALIA PTY. option to extend to six years at time of $470,000 (if three year commitment) escalation and currency exchange provisions in ATWOOD OSPREY 8,200' mobilized to Australia. LTD delivery of rig) $450,000 (if six-year commitment) the contract. DEEPWATER SEMISUBMERSIBLE FIRM WORK – ATWOOD EAGLE September/October 2011 (Six months $450,000 (until the ATWOOD OSPREY Day rate subject to change due to cost after the ATWOOD OSPREY commences commences operations in escalation and currency exchange provisions in ATWOOD EAGLE 5000' Australia CHEVRON operations in Australia) Australia)/$390,000 thereafter the contract. FIRM WORK – ATWOOD FALCON November 2011/January 2012 Day rate subject to change due to cost (depending on the length of the drilling $431,000 (until August 24 th) /$300,000 escalation and currency exchange provisions in ATWOOD FALCON 5000' Malaysia SHELL program) thereafter the contract. The rig could incur approximately 20 zero rate days in the fourth quarter of fiscal year 2011 for regulatory inspections and planned maintenance. Day rate subject to change due KOSMOS ENERGY GHANA to cost escalation and currency exchange ATWOOD HUNTER 5000' Ghana/ Equatorial Guinea INC/NOBLE FIRM WORK - October 2012 $538,000 to $545,000 provisions in the contract. JACK-UP Under construction in Singapore with delivery expected in the ATWOOD MAKO 400' fourth quarter of fiscal year 2012. --- AVAILABLE N/A Under construction in Singapore with delivery expected in the first ATWOOD MANTA 400' quarter of fiscal year 2013. --- AVAILABLE N/A Under construction in Singapore with delivery expected in the third ATWOOD ORCA 400' quarter of fiscal year 2013. --- AVAILABLE N/A The contract provides an option to drill one (1) additional well at the current contracted day MURPHY SURINAME OIL rate. This option must be exercised by 10 days COMPANY, LTD./REPSOL after the start of the second firm well. The rig EXPLORATION S.A./TEIKOKU could incur approximately five zero rate days OIL (SURINAME) CO. LTD. in the third quarter of fiscal year 2011 for (INPEX) (“BEACON OPERATOR FIRM WORK – September/October regulatory inspections and planned ATWOOD BEACON 400' Suriname/Guyana GROUP”) 2011 (4 wells) $115,000 maintenance Effective January 29, 2011, RWE $133,000 gave notice of a force majeure event due to the civil unrest in Egypt. The current operating rate is 70% of contract day rate for the first 15 days of the forecast majeure event and 50% thereafter until the event is remediated or contract is terminated, whichever occurs first. Contract can be terminated by either party after a 30 day period of a continuing force majeure event. RWE DEA NILE GmbH Day rate subject to change due to cost Source: Yahoo finance, daily ATWOOD AURORA 350' Egypt finance. *No industry average data WORK – April 2011 (“RWE”) FIRM $133,000 escalation provisions in the contract. VICKSBURG 300' Thailand for Profit Margin WORK – June 2011 NUCOASTAL (THAILAND) LIMITED FIRM $90,000
- 11. Fleet Data: FY10 FY09 FY08 FY07 FY06 Rigs owned/managed end of period 9 9 8 8 10 Utilization rate 88% 85% 100% 100% 100% Utilization rate is a critical measure for offshore drilling firms. It represents operational efficiency which is a major determinant of revenue and profit. Source: 10K FY2010
- 12. Contract Drilling FY11 FY12 FY13 FY14 Totals Revenue Backlog (in millions) Semisubmersibles (1) $525 $375 $170 $90 $1,160 Jack-ups $75 $75 Totals $600 $375 $170 $90 $1,235 Percent of Available 88% 30% 12% 5% n/a Operating Days Committed (1) The Atwood Osprey contract with Chevron Australia Pty. Ltd. is for a firm three (3) year period, with an option to extend the firm period to six (6) years (which must be exercised within seven (7) days of delivery of the rig from the shipyard). The contract provides for an operating day rate of approximately $470,000, if the firm commitment is three (3) years and approximately $450,000, if the option is exercised to extend the firm commitment period to six (6) years. Both day rates are subject to adjustment pursuant to cost escalation provisions of the contract. Source: 10K FY2010
- 13. Financial data In charts
- 14. ATW Income Snapshot Past 6 Years $800.00 $600.00 $400.00 $200.00 $0.00 2005 2006 2007 2008 2009 2010 Revenues Operating Income CapEX Net Income Source: 10K FY2010; in millions
- 15. Revenue Efficiency Gross Margin (ttm): Operating Margin Profit Margin 70.00% 61.20% 60.00% 58.10% 49.55% 50.00% 55.43% 44.41% 50.11% 39.50% 42.77% 40.00% 37.90% 30.00% 32.35% 20.00% 27.53% 10.00% 8.68% 0.00% -10.00% ATW 1.87% DO NBR-2.32% RIG Industry Source: Yahoo finance, daily finance. *N/A industry average data for profit margin
- 16. Capital Management Efficiency 45 43.58 40 35 30 22.88 25 20 16.16 17.16 15 17.19 10 12.28 5 0 7.6 1.68 ATW DO NBR RIG ROE ROA Source: Yahoo finance, Daily finance
- 17. Comparison of Debt Ratios 60 58.89 50 48.66 40.01 43.2 40 30 29.23 36.3 20 16.79 14.37 10 4.05 3.5 0 1.13 ATW 1.63 DO NBR RIG Current Ratio Total Debt to Capital (MRQ) LT Debt to Equity Ratio (MRQ) Source: Daily Finance
- 18. Valuation Comparisons 30 29.15 25 25.72 20 15 10.37 10.17 10 10.41 5 0.67 4.74 1.37 0 1.94 ATW 1.82 DO NBR RIG Industry P/E (ttm): PEG (5 yr expected): Source: Daily Finance, Yahoo Finance
- 19. What are the catalysts to push the stock higher in the next 12-18 months?
- 20. 1. In it’s latest Oil Market Report the International Energy Agency (IEA) revises global oil product demand upwards by an average 320 kb/d. Global oil demand is projected to rise from 87.7 mb/d in 2010 to 89.1 mb/d in 2011; an increase of 1.4 mb/d. IEA also notes that supply fell in December due to temporary cutbacks in non-OPEC production. 2. Consensus of analysts and market leaders project the major factors asserting upward pressure on the price of oil will persist through 2011. Many project the price of oil to top the $100 mark in 2011. Persistent elevated oil prices incentivize major oil firms to invest more funds into exploration and production. 3. Atwood’s three largest clients in FY10 were Chevron, Shell, and Kosmos Energy. 4. In December 2010 Chevron announced a ~23 Billion USD Capital and Exploratory budget for 2011. Additionally, Shell and Kosmos Energy have existing contracts through 2011 and 2012 respectively, paying an average day rate of almost $400,000. Chevron also has existing contracts paying Atwood an average day rate of $430,000 through 2ND quarter FY2014. 5. Atwood’s 2010 10K states, industry wide demand is high for high specification jack-up and deepwater rigs. Deepwater rig utilization rate remains above 86% with ultra- deepwater approaching full utilization. Atwood currently has 3 ultra-deepwater and 3 high-spec jack-up rigs under construction; with delivery dates ranging from 2nd quarter FY2011 through 4th quarter FY2013. Source: 1. omrpublic.iea.org; 4. Chevron.com; 10K FY2010
- 21. 1. Examining the 52 week chart a couple things stand out. 1) After the BP disaster there was an extremely negative market reaction to the offshore drilling industry and ATW’s stock. ATW twice tested a 52 week low of ~$24 (Jun, Aug) down from a high of ~$37. 2) After the August low there was a steady bid until the previous 52 week high where it briefly made new highs before being sold down in November. 2. A support level was established at the $35 price level. The stock traded between $35 and its 52 week high of $38 from Nov. until late Jan where the stock broke out leading up to ATW’s 1st quarter earnings in Feb for FY2011. Source: Finviz.com
- 22. 1. Price action was decisively positive leading up to 1st quarter earnings on Feb 3rd. 2. ATW reported earnings of $.81 per share beating consensus estimates of $.77 and yet the stock opened down 6% touching below $38.50 intraday. 3. ATW’s trading volume spiked that day and got bid back up to close above $40 showing significant strength in the process. 4. The stock has demonstrated a consistent pattern of establishing value at higher and higher levels continuing the rally that started from the double test of the August low. Source: StockCharts.com
- 23. 1. I expect the $40-$41 price range to act as support for further price action upwards. 2. We have to look back to at least Sept. 2008 before we find price action beyond the new 52 week high. 3. I expect traders to seek value upwards toward the $45 range for the near term reflecting price levels last scene in April and August 2008 respectively. Source: StockCharts.com
- 24. ? Atwood Oceanics has shown consistency in managing the key driver for profitability in its industry, and that is maintaining high utilization rates for its rigs. I believe this is the driving force for the growth strategy being engineered by management. ? Based on the experience of key executives including CEO/President Robert Saltiel, I believe they would not have optioned the construction of the third high-spec jack-up rig or committed to the development of a new $600 million ultra-deepwater drillship unless they felt they could maintain high utilization rates. ? The fact that they committed significant resources to this end leads me to conclude that forward looking estimates from management are decisively positive, in that management will be able to maintain their current safe, efficient operations while establishing new contracts for their rigs under current construction. ? The confluence of factors including: upward macroeconomic pressures on oil prices, ATW’s stock price action, management’s consistency and efficiency in managing company growth, and the great valuation ratios relative to its competitors leads me to conclude this stock is a great value investment for the short and long term.
- 25. Presented by Brian Roberts Any questions comments or concerns contact: Brian Roberts kngllc@gmail.com 617.642.9211