The offshore drillers have witnessed carnage in the last 2-3 months with big names like Seadrill (SDRL, Financial) and Transocean (RIG, Financial) among the worst hit in the sector. In particular, Seadrill has been a victim of over leverage, and the company is likely to struggle in 2015 as oil prices move below $50 per barrel.
On the other hand, Transocean also has debt and the company’s contract coverage for 2015 is low. This makes both these stocks undesirable for investment in the first half of 2015. I must add that Seadrill has suspended dividends and I believe that Transocean will also suspend dividends when the company releases its 4Q14 results.
With big names suffering, there are few attractive names in the sector. In particular, Atwood Oceanics (ATW, Financial) looks attractive among the offshore drillers. Atwood is currently trading at $27.17 and at an EV/EBITDA valuation of 6.1. The company’s EV/EBITDA valuation is still lower than Seadrill, which is currently trading at an EV/EBITDA of 7.4. However, the company’s outlook for 2015 is much brighter than Seadrill and this article discusses the reasons to consider some exposure to Atwood at current levels.
On January 12, 2015, Atwood announced a contract for jackup Atwood Mako. My trigger for writing this article was this latest contract that further improves the company’s contract coverage for 2015.
The contract will be performed in Southeast Asia at an operating day rate of $155,000 for a minimum term of 70 days, and it includes a priced option for an additional term. Atwood Mako will be completing the current contract in late March 2015, and this contract ensures that there is no idle time for the jackup. The contract also ensures high utilization for jack-up for 2015 as other jackup rigs for the company are contracted through 2015.
Besides the current contract, Atwood also has good contract coverage for ultra-deepwater and deepwater semisubmersible. In the ultra-deepwater segment, the only concern is the contracting of one rig that is scheduled for delivery in September 2015. However, the company still has ample time to market the rig.
In the deepwater semisubmersible segment, one rig is idle while others are contracted for the current financial year. In other words, the contract coverage is high overall and if this sustains, Atwood is well positioned to clock decent revenue in FY15. The company’s FY16 revenue will also be robust as by September 2016, the company will have two new ultra-deepwater rigs in its fleet.
From a dividend perspective, Atwood has a current dividend payout of $1 per share and a dividend yield of 3.6%. In my view, the dividend is sustainable as the company’s revenue is likely to be around the same levels in FY15 as it was in FY14. This is another advantage of exposure to Atwood as compared to Seadrill or Transocean.
In conclusion, Atwood has an excellent fleet that is capable of delivering robust returns when the offshore market recovers along with recovery in oil prices. As the stock has declined from 2014 peak of $53.79 to current levels of $27.17, the buying opportunity is good with a medium to long-term time horizon.
