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The Case for Atwood Oceanics Inc. (ATW)
1.
2. Ticker > ATW
Stock Price > $37.85 as of 1.21.11
Shares Outstanding > 64,470,000
Market Cap > 2.44 Billion
Source: Yahoo finance
3. Atwood was incorporated in 1968
Their purpose was to:
engage in contract drilling of exploratory and
development oil and gas wells in offshore
areas
related support, management and consulting
services
Source: ATWD.com (Atwood Oceanics website)
4. Atwood’s vision:
Being a Safety, Health, Environmental
and Security leader
Having outstanding rig and employee
performance
Being the number one choice of clients
Increasing profitability and share price
Source: ATWD.com (Atwood Oceanics website)
5.
6. Robert J. Saltiel CEO:
I'd also like to comment on Atwood's 2010 safety
performance. It was simply the best in our Company's
42-year history. We concluded fiscal year 2010 with a
total recordable incident rate, which is the industry
benchmark measure for injury frequency, of less than
0.8 incidents per 200,000 man hours. This represents 13%
improvement over Atwood's 2009 results and most
importantly enabled us to avoid any fatalities or
debilitating injuries on any of our rigs
Source: Q4 2010 Earnings Call Transcript
7.
8. What is the size and composition of the Rig
Fleet? More importantly what is their Rig
Utilization Rate, since Atwood gets paid
on a per day usage basis?
9. ATWOOD FALCON ATWOOD HUNTER
ATWOOD EAGLE ATWOOD OSPREY
Source: 10K FY2010, Q1 FY2011; **Please use your zoom function to review the following rig fleet
and contract status data
10. Rig Name Rated Water Depth Location Customer Estimated Contract End time Estimated Contract Day Rate Additional comments
ULTRA-DEEPWATER
Under construction in Korea with
delivery expected in the fourth
ATWOOD ADVANTAGE 12,000' quarter of fiscal year 2013. --- Available N/A
Under construction in Singapore
with delivery expected in the third
ATWOOD CONDOR 10,000' quarter of fiscal year 2012 --- Available N/A
FIRM WORK – Second quarter fiscal
Under construction in Singapore year 2014 if three-year commitment or
with delivery expected in the second quarter fiscal year 2017 if six-
second quarter of fiscal year 2011 year commitment. (Contract provides Day rate subject to change due to cost
at which time the rig will be CHEVRON AUSTRALIA PTY. option to extend to six years at time of $470,000 (if three year commitment) escalation and currency exchange provisions in
ATWOOD OSPREY 8,200' mobilized to Australia. LTD delivery of rig) $450,000 (if six-year commitment) the contract.
DEEPWATER SEMISUBMERSIBLE
FIRM WORK – ATWOOD EAGLE
September/October 2011 (Six months $450,000 (until the ATWOOD OSPREY Day rate subject to change due to cost
after the ATWOOD OSPREY commences commences operations in escalation and currency exchange provisions in
ATWOOD EAGLE 5000' Australia CHEVRON operations in Australia) Australia)/$390,000 thereafter the contract.
FIRM WORK – ATWOOD FALCON
November 2011/January 2012 Day rate subject to change due to cost
(depending on the length of the drilling $431,000 (until August 24 th) /$300,000 escalation and currency exchange provisions in
ATWOOD FALCON 5000' Malaysia SHELL program) thereafter the contract.
The rig could incur approximately 20 zero rate
days in the fourth quarter of fiscal year 2011
for regulatory inspections and planned
maintenance. Day rate subject to change due
KOSMOS ENERGY GHANA to cost escalation and currency exchange
ATWOOD HUNTER 5000' Ghana/ Equatorial Guinea INC/NOBLE FIRM WORK - October 2012 $538,000 to $545,000 provisions in the contract.
JACK-UP
Under construction in Singapore
with delivery expected in the
ATWOOD MAKO 400' fourth quarter of fiscal year 2012. --- AVAILABLE N/A
Under construction in Singapore
with delivery expected in the first
ATWOOD MANTA 400' quarter of fiscal year 2013. --- AVAILABLE N/A
Under construction in Singapore
with delivery expected in the third
ATWOOD ORCA 400' quarter of fiscal year 2013. --- AVAILABLE N/A
The contract provides an option to drill one (1)
additional well at the current contracted day
MURPHY SURINAME OIL rate. This option must be exercised by 10 days
COMPANY, LTD./REPSOL after the start of the second firm well. The rig
EXPLORATION S.A./TEIKOKU could incur approximately five zero rate days
OIL (SURINAME) CO. LTD. in the third quarter of fiscal year 2011 for
(INPEX) (“BEACON OPERATOR FIRM WORK – September/October regulatory inspections and planned
ATWOOD BEACON 400' Suriname/Guyana GROUP”) 2011 (4 wells) $115,000 maintenance
Effective January 29, 2011, RWE $133,000
gave notice of a force majeure event due to
the civil unrest in Egypt. The current
operating rate is 70% of contract day rate for
the first 15 days of the forecast majeure
event and 50% thereafter until the event is
remediated or contract is terminated,
whichever occurs first. Contract can be
terminated by either party after a 30 day
period of a continuing force majeure event.
RWE DEA NILE GmbH Day rate subject to change due to cost
Source: Yahoo finance, daily
ATWOOD AURORA 350' Egypt finance. *No industry average data WORK – April 2011
(“RWE”) FIRM $133,000 escalation provisions in the contract.
VICKSBURG 300' Thailand
for Profit Margin WORK – June 2011
NUCOASTAL (THAILAND)
LIMITED FIRM $90,000
11. Fleet Data: FY10 FY09 FY08 FY07 FY06
Rigs
owned/managed
end of period 9 9 8 8 10
Utilization rate 88% 85% 100% 100% 100%
Utilization rate is a critical measure for offshore drilling firms. It represents
operational efficiency which is a major determinant of revenue and
profit.
Source: 10K FY2010
12. Contract Drilling FY11 FY12 FY13 FY14 Totals
Revenue Backlog
(in millions)
Semisubmersibles (1) $525 $375 $170 $90 $1,160
Jack-ups $75 $75
Totals $600 $375 $170 $90 $1,235
Percent of Available 88% 30% 12% 5% n/a
Operating Days Committed
(1) The Atwood Osprey contract with Chevron Australia Pty. Ltd. is for a firm three (3) year period, with an option to
extend the firm period to six (6) years (which must be exercised within seven (7) days of delivery of the rig from
the shipyard). The contract provides for an operating day rate of approximately $470,000, if the firm
commitment is three (3) years and approximately $450,000, if the option is exercised to extend the firm
commitment period to six (6) years. Both day rates are subject to adjustment pursuant to cost escalation
provisions of the contract.
Source: 10K FY2010
14. ATW Income Snapshot Past 6 Years
$800.00
$600.00
$400.00
$200.00
$0.00
2005 2006 2007
2008
2009
2010
Revenues Operating Income CapEX Net Income
Source: 10K FY2010; in millions
15. Revenue Efficiency
Gross Margin (ttm): Operating Margin Profit Margin
70.00%
61.20%
60.00% 58.10%
49.55%
50.00% 55.43%
44.41% 50.11%
39.50% 42.77%
40.00% 37.90%
30.00%
32.35%
20.00% 27.53%
10.00%
8.68%
0.00%
-10.00% ATW 1.87%
DO
NBR-2.32%
RIG
Industry
Source: Yahoo finance, daily finance. *N/A industry average data for profit margin
17. Comparison of Debt Ratios
60 58.89
50
48.66
40.01 43.2
40
30 29.23 36.3
20 16.79
14.37
10 4.05
3.5
0
1.13
ATW 1.63
DO
NBR
RIG
Current Ratio Total Debt to Capital (MRQ) LT Debt to Equity Ratio (MRQ)
Source: Daily Finance
19. What are the catalysts to push the stock
higher in the next 12-18 months?
20. 1. In it’s latest Oil Market Report the International Energy Agency (IEA) revises global oil
product demand upwards by an average 320 kb/d. Global oil demand is projected
to rise from 87.7 mb/d in 2010 to 89.1 mb/d in 2011; an increase of 1.4 mb/d. IEA also
notes that supply fell in December due to temporary cutbacks in non-OPEC
production.
2. Consensus of analysts and market leaders project the major factors asserting upward
pressure on the price of oil will persist through 2011. Many project the price of oil to top
the $100 mark in 2011. Persistent elevated oil prices incentivize major oil firms to invest
more funds into exploration and production.
3. Atwood’s three largest clients in FY10 were Chevron, Shell, and Kosmos Energy.
4. In December 2010 Chevron announced a ~23 Billion USD Capital and Exploratory
budget for 2011. Additionally, Shell and Kosmos Energy have existing contracts
through 2011 and 2012 respectively, paying an average day rate of almost $400,000.
Chevron also has existing contracts paying Atwood an average day rate of $430,000
through 2ND quarter FY2014.
5. Atwood’s 2010 10K states, industry wide demand is high for high specification jack-up
and deepwater rigs. Deepwater rig utilization rate remains above 86% with ultra-
deepwater approaching full utilization. Atwood currently has 3 ultra-deepwater and 3
high-spec jack-up rigs under construction; with delivery dates ranging from 2nd quarter
FY2011 through 4th quarter FY2013.
Source: 1. omrpublic.iea.org; 4. Chevron.com; 10K FY2010
21. 1. Examining the 52 week chart a couple things stand out. 1) After the BP disaster there was an
extremely negative market reaction to the offshore drilling industry and ATW’s stock. ATW
twice tested a 52 week low of ~$24 (Jun, Aug) down from a high of ~$37. 2) After the August
low there was a steady bid until the previous 52 week high where it briefly made new highs
before being sold down in November.
2. A support level was established at the $35 price level. The stock traded between $35 and its
52 week high of $38 from Nov. until late Jan where the stock broke out leading up to ATW’s 1st
quarter earnings in Feb for FY2011.
Source: Finviz.com
22. 1. Price action was decisively
positive leading up to 1st quarter
earnings on Feb 3rd.
2. ATW reported earnings of $.81
per share beating consensus
estimates of $.77 and yet the
stock opened down 6% touching
below $38.50 intraday.
3. ATW’s trading volume spiked
that day and got bid back up to
close above $40 showing
significant strength in the
process.
4. The stock has demonstrated a
consistent pattern of establishing
value at higher and higher levels
continuing the rally that started
from the double test of the
August low.
Source: StockCharts.com
23. 1. I expect the $40-$41 price
range to act as support for
further price action upwards.
2. We have to look back to at
least Sept. 2008 before we
find price action beyond the
new 52 week high.
3. I expect traders to seek value
upwards toward the $45
range for the near term
reflecting price levels last
scene in April and August
2008 respectively.
Source: StockCharts.com
24. Atwood Oceanics has shown consistency in managing the key driver for profitability in
its industry, and that is maintaining high utilization rates for its rigs. I believe this is the
driving force for the growth strategy being engineered by management.
Based on the experience of key executives including CEO/President Robert Saltiel, I
believe they would not have optioned the construction of the third high-spec jack-up
rig or committed to the development of a new $600 million ultra-deepwater drillship
unless they felt they could maintain high utilization rates.
The fact that they committed significant resources to this end leads me to conclude
that forward looking estimates from management are decisively positive, in that
management will be able to maintain their current safe, efficient operations while
establishing new contracts for their rigs under current construction.
The confluence of factors including: upward macroeconomic pressures on oil prices,
ATW’s stock price action, management’s consistency and efficiency in managing
company growth, and the great valuation ratios relative to its competitors leads me to
conclude this stock is a great value investment for the short and long term.
25. Presented by Brian Roberts
Any questions comments or concerns contact:
Brian Roberts
kngllc@gmail.com
617.642.9211