Atwood Industries is an offshore oil rig company. It owns 11 offshore drilling units in the U.S., Mediterranean Sea, offshore West Africa, Southeast Asia and Australia. In addition to the 11 rigs in fleet, it has two more ultra-deepwater rigs under construction in South Korea, scheduled for completion on September 2017 and June 2018. Ultra-deepwater rigs generate the most revenue for Atwood (52%) while making up 47% of drilling costs.
I was drawn to Atwood based on the low valuation criteria:
- P/E of 1.26 (TTM)
- P/B of 0.16
- P/FCF of 1.25 - TTM free cash flow per share is $6.32 per share, which also gives a payback time of one and a quarter years to repay investment from free cash flow
The fact that Atwood has achieved these valuations despite a depressed oil market makes it a value pick.
Moreover, by comparison to the general overpriced market - trading at P/E of 27.3Ă‚ - Atwood is trading at a fraction of the markets earning multiple. Indeed, by looking more closely at a competitive and cyclical rig market, Atwood also stands out for its margins and fundamentals in its industry peer group.Ă‚
Additionally, management seems to be in a position to manage current liabilities. As of the most recent quarterly report (Aug. 2, 2016), Atwood held $198,974,000 in cash and $86.27 million in current liabilities (current cash to current liabilities ratio of 2.3). Moreover, Atwood, recently repurchased $159.3 million of senior notes for $102.5 million on the open market - another value-oriented management decision - retiring $58.3 million of debt obligations. In addition to paying down debt, management is making cost cutting measures to increase the bottom line. In fiscal 2016, they reduced contract drilling costs by 10% ($60 million) versus our 2015 fiscal year budget, and they reduced sales, general and administrative expense by 9% ($5 million) and headcount by 7% versus the 2015 budget.
Some articles I have read have criticized Atwood’s contracted revenue days committed as an issue for the company, citing the decline in oil rigs and the oil market - in general - making it difficult for Atwood to acquire new contracts. However, such analysis - in my view - is shortsighted and does not take into account Atwood’s history in a lucrative oil market. In 2012, for example, oil was selling for $91.20, almost double its current cost. At that time, Atwood’s Nov. 11, 2012, 10-K filing showed only 82% of operating days committed for fiscal year 2013 as of the date of filing.
Fast forward to 2016 and despite nearly a 50% drop in oil price from 2012, the percentage of operating days committed has dropped from 82% to 66%, a 20% decline. Albeit, contractual arrangements - such as day rates - for production is without question in the buyers favor, not Atwoods.
In the three months ending June 30, 2016, Atwood generated $227.797 million in revenue and spent $138,484 on cost of drilling (nearly 40% margins). It has another $215 million contracted for the remaining quarter in 2016 (expected eps of $1.50 per share).
In the first nine months of 2016, they generated $831.97 million in revenue and $280.51 million in operating income (33% margins in nine months). Add the additional $215 million contracted revenue for the final quarter of 2016, and ATW could generate $1.05 billion in revenue, with expected operating income of $345.499 million.
Divide expected operating income ($345.499 million) by 64,798,000 (shares outstanding) and operating income per share equals $5.33 in fiscal 2016. At the current share price of $9, that is a bargain.
Fast forward to fiscal 2017, and consider Atwood’s current backlog of contracted revenue. Given that Atwood has a total of $393 million in contracted drilling revenue for 2017 (approximately 38% of revenue generated in fiscal 2016), future operating income for fiscal 2017 (at only 23% of rigs contracted) is $137.56 million or $2.12 per share for fiscal 2017 (equivalent to a price/operating Income of 3.3); however, that is with the upside potential of 73% of Atwood not even contracted yet. It is a bet, nonetheless, but one I feel offers a more than reasonable margin of safety at its current price.
The problem I have with ATW is the long term debt ($1.38 billion) owed for the two new rigs (ultra-deep water rigs, which generate the most revenue), senior note debt and credit facility. With $198.97 million in cash assets (see balance sheet) and $166.53 million in accounts receivables, it does seem like Atwood may be able to manage the long-term debt, though they will have to utilize cash assets and future operating income to do so.
That being said, I am long on Atwood. I own shares outright, and I sold puts that I would be totally fine with owning if they are exercised on expiration. I am just a regular DIY investor, and I don't own any fund or work on Wall Street.Ă‚
