Atwood Oceanics (ATW) has long been a good investment in offshore drilling and even deepwater drilling as well. Its focus on the international waters with limited projects in the Gulf of Mexico helped the company thrive in 2010.
One of the bigger issues with ATW has been the relative old age of their ships. With Monday's announcement of a new ultra-deepwater drillship order, they've completely transformed the company into a focus on newbuilds. The ordering of yet another ship means that a company with 9 current operating offshore drilling rigs now has 6 rigs in various stages of building. Not to mention they retain options on two more ultra-deepwater drillships and two premium jackups.
Prior to this recent surge of four orders that have all happened since the announcement of the retirement of the previous CEO, Atwood had over 50% of it's existing rigs built prior to 1985 making the average rig 25+ years old. Naturally they've had upgrades over the years, but 25-35 year old rigs just don't have the operating capability and functions needed for modern drilling. In fact, ATWs only has two ships built within the last 10 years, so the newbuild program might just be what they need to remain relevant.
While new rigs have huge advantages, one has to wonder if ATW is taking on too much at once. The company has limited debt and had net income of roughly $250M, and a cash flow of $300M last fiscal year, so it appears they can handle by using cash flow and levering up a bit.
Its also concerning whether the market can handle the growing order logs at the larger shipyards.
Dalman Rose & Co recently downgraded ATW, Diamond Offshore (DO), Seadrill (SDRL), and others based on the fear of a glut in deepwater rigs based on a surge in order flows. They see the recent order pace as the fastest in four years and a big issue with demand still held back by the moratorium in the Gulf.
The fear is worth noting, but since it takes nearly 3 years before these orders are built and ready for drilling, it seems very premature to worry about a glut. Especially with oil approaching $100 and the disturbances in Egypt reminding us that while offshore drilling has operational risks, onshore drilling in the Middle East has larger political issues.
The other major issue in the sector remains the age of the existing fleets. While limited information can be found, most drillers maintain very old fleets with numerous rigs over 25 years old similar to ATW. Its very likely that drillers will finally be forced to retire numerous rigs leaving the supply more limited then Dahlman expects.
Airplane leasers are considered strong when fleet ages average less then 10 years and are focused on modern plane designs. The time is likely coming soon when drillers also get that focus. Modern fleets will be much more attractive, and those companies will likely benefit.
Atwood is heading in the correct direction, if they haven't chewed off too many orders. The first of the six newbuilds should be operational in the second quarter. The stock is attempting to break out of the $40 range where it failed 3x at the end of 2009. Follow through could signal much higher stock prices in the short term.
List of ships on order with expected delivery date:
6/1/11 - Atwood Osprey: conventionally moored semisubmersible unit rated for water depths of 6,000 feet with its own mooring equipment and 8,200 feet with pre-laid moorings.
7/1/12 - Atwood Condor: ExD Millennium class ultra-deepwater DP semisubmersible with 10,000 feet of water depth capability and state-of-the-art drilling and completion features.
9/30/12 - Atwood Mako: Pacific Class 400 jack-up drilling unit with PPL Shipyard PTE LTD ("PPL") will have a rated water depth of 400 feet, accommodations for 150 personnel and significant offline handling features.
12/31/12: Atwood Manta: Pacific Class 400 jack-up drilling unit with PPL Shipyard PTE LTD ("PPL") will have a rated water depth of 400 feet, accommodations for 150 personnel and significant offline handling features.
6/30/13: Atwood Orca: Pacific Class 400 jack-up drilling unit with PPL Shipyard PTE LTD ("PPL") will have a rated water depth of 400 feet, accommodations for 150 personnel and significant offline handling features.
9/30/13 - Atwood Advantage: DP-3 dynamically-positioned, dual derrick ultra-deepwater drillship rated to operate in water depths up to 12,000 feet and to drill to a depth of 40,000 feet.
Disclosure: I am long ATW.
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