Atwood Oceanics (ATW, Financial) is an oil drilling company, and the stock has suffered due to falling oil prices as has been the case with many other offshore drilling companies. I still believe Atwood has the potential to grow and provide good returns. However, the stock is a high-risk stock at this point and investors should consider small exposure. This article deals with various reasons why the stock has upside potential and how it will continue to create shareholder value.
Attractive valuations
Analyst rate the stock as outperform primarily because the company is trading at attractive valuations with healthy profitability and growth ratios. Atwood is trading at an estimated 2015 EV/EBITDA of 5.1 less than close peers Seadrill’s (SDRL, Financial) 7.4 and Noble Corporation’s (NE, Financial) 6.4.
The company also looks attractive against the sector’s EV/EBITDA of 5.7. In addition to EV/EBITDA, the company is also trading at a PE of 5.4 less than industry average of 7.9. Thus, a low EV/EBITDA and PE suggest the stock is undervalued and will outperform once the market is back in shape.
Financials are strong
Apart from an attractive valuation, Atwood’s financials also look strong. Revenue has been increasing over the years and with well-managed costs the company has improved its operating and net margins to 34% and 29% respectively, which is better than the industry average.
For fiscal 2014 the returns on equity and capital was impressive and strong returns are likely to continue. The delivery of new rigs in 2015 and 2016 would further provide better shareholder returns.
| Key metrics | Company | Industry |
| Gross Margin | 52.1 | 46.9 |
| Pre-Tax Margin | 33.8 | 21.5 |
| Net Profit Margin | 29.0 | 16.3 |
| Return on Equity % | 14.3 | 10.0 |
| Return on Assets % | 8.4 | 4.9 |
| Return on Capital % | 9.7 | 5.8 |
High quality fleet
The company currently has four ultra-deepwater drillships (two are under construction to be delivered by 2016), two ultra-deepwater semisubmersibles, three deepwater semisubmersibles and five high-specification jack-ups.
An investment of $4.5 billion in expanding the high specification rig fleet is expected to increase the EBITDA for 2015. Moreover, modern A-Class drillships as compared to the typical 5th generation drillships will improve the fleet age and also boost the overall backlog
Over the years Atwood’s revenue weighted average weight of the fleet has been improving and with the delivery of Atwood Admiral in 2015 and Atwood Archer in 2016, the average age of the fleet is expected to be the best amongst the peers. Further, young and high quality fleet would thus put Atwood in a better position to demand higher day rates as compared to peers Ensco (ESV, Financial) and Transocean (RIG, Financial).
Source: Company Presentation
Contracts Are Stable With Impressive Backlog
In spite of the current turmoil in the oil industry I still believe Atwood’s earnings would be stable. This is primarily because all the four ultra-deepwater rigs of the company’s are 100% contacted for 2015 with an extension of their contracts in 2016.
Further, the delivery of two new rigs in 2015 and 2016 is expected to be a catalyst of growth for Atwood owing to its high specification and age. Also, two of the three deepwater semi-submersibles are fully contracted for the fiscal 2015.
Moreover, Atwood has a very strong customer base which further supports stable cash inflows. Also, considering the fact that Atwood’s key revenue drivers are its ultra-deepwater rigs and semi-submersible rigs, earnings look stable and predictable.
Atwood has a current order backlog of $2.9 billion with 84% of the days in 2015 being fully contracted. Based on the current backlog the company’s revenue growth is still expected to grow by 10% to $1,285 million in fiscal 2015.
For 2016 the company has a contact backlog of $1,127 million with only 53% of the available day in contract. This also looks pretty decent and with the expectation of oil prices getting stable a better revenue growth is expected during the year.
Conclusion
Attractive valuation and well managed contracts for 2015 and 2016 are key investment positives for Atwood. The company has suffered due to decreasing oil prices and can be considered a good entry point considering a strong backlog of $2.9 billion with some of the major oil giants, cash in-flow looks stable.
