For all of the talk of "catalysts," it's easy to think that Wall Street has a short attention span, and that may not be far from the truth. At a minimum, the Street is quick to incorporate new information into stock prices, and stocks can languish in the absence of a constant stream of positive news. That leaves Atwood Oceanics (NYSE:ATW) in a potential predicament for 2013. While Atwood has done an impressive job of realigning its fleet towards higher-value assets, the lack of new contract opportunities could leave the stock trading on reported margins, industry pricing trends and prospects for a MLP conversion.
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Small Isn't Always Bad
Within the offshore drilling world, Atwood is a relatively small player. The company presently has nine active rigs (and two more cold-stacked rigs that are unlikely to come back online soon, if ever). To put that into perspective, SeaDrill (NYSE:SDRL), Ensco (NYSE:ESV) and Noble (NYSE:NE) all have more rigs in shipyard queues than Atwood has in total, and likewise the fleet at Transocean (NYSE:RIG) dwarfs that of Atwood.
But small doesn't mean non-competitive. Atwood has evolved from being mainly a mid-water operator towards a much heavier focus on deepwater operations. Five of the company's active rigs are deepwater or ultra-deepwater (UDW), and another three UDW rigs are under construction. As a reminder, dayrates (the rate a driller such as Atwood gets paid for a day's drilling) for deepwater and UDW rigs are typically considerably higher than those for midwater or shallow rigs.
Atwood also has good geographic exposure. Nearly half of the company's revenue comes from operations near Australia, and another quarter comes from offshore Africa. Not only are these areas seeing rapid growth in exploration activity, but they're also relatively more protected from the sort of "local content" laws that have made operating in Brazilian waters more challenging recently.
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Waiting for the Queue to Deliver
Atwood presently has five rigs under construction, with three of them being ultra-deepwater floaters/drillships and two premium jack-ups. The three UDW rigs are all being constructed in South Korea, and they are due to be delivered in September of 2013, June of 2014 and March of 2015, with only the first in line under contract. Atwood also has fixed-price options to put up to four more rigs in the production queue if management so chooses.
While that production queue will meaningfully expand the company's fleet and revenue potential, there's less excitement likely in the near-term. More specifically, it doesn't look like the company will have much contracting activity to report until later in 2013. That will leave investors mulling over the company's operating costs (and profits) and the wiggles and waggles in industry dayrates as the principal pieces of new information in the near term.
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Will Engineering Produce Value?
There's been recent interest in the drilling sector in seeing these companies convert to MLP structures, and SeaDrill has done so with part of its fleet. While I can appreciate some of the advantages of such a conversion (particularly the tax savings and depreciation) given the strong dayrates and contract terms at present, I'm not sure this is really a big value-driver for Atwood. In other words, I think there's usually more value in the quality of a company's operations as opposed to the form of its business.
That's not to say that there couldn't be financial activity for Atwood. The company's fleet is small and a little old (though the company has performed significant renovations not all that long ago), it would be an easy incremental acquisition for a larger player. I don't necessarily expect this (particularly given the aggressive newbuild programs at SeaDrill, Ensco and Noble), but it's not a ridiculous idea either.
The Bottom Line
Dayrates have improved more than 50% from 2011 lows, and investors have jumped back on the offshore drilling bandwagon. As such, Atwood is not an especially cheap stock today. At 8 times 2013 EBITDA, the stock's fair value would be around $50 - not much different than today's price. While some would contend that Atwood's fleet age and quality argue for a premium, even a full point premium to the EV/EBITDA ratio doesn't make the stock a compelling buy today.
That said, there aren't a lot of bargains left in the deepwater/offshore sector, so Atwood's relative valuation is not so bad. Still, bargain hunters are likely to find more to love in the shares of Transocean at today's prices.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.