Tuesday, December 16, 2014

This Offshore Drilling Stock May Thrive Despite Falling Oil Prices

This article was originally published by TheStreet on November 20, 2014
By Sarfaraz A. Khan. Research Asst. Daniel L. 
NEW YORK (TheStreet) -- The offshore drilling market has been struggling with overcapacity and falling crude oil prices, but Atwood Oceanics (ATW) is a rare gem that could see double-digit revenue growth.
In an email to TheStreet, Mark Mey, Atwood's chief financial officer said the offshore driller is one of only two expected to grow revenue and earnings per share into 2016. Mey didn't mention the name of the other driller, but it's likely Houston-based Rowan Companies (RDC) , which has forecast revenue growth for 2015. Goldman Sachs analyst Waqar Syed said in a November report that this will lead to higher earnings for Rowan.

Atwood has been generating higher revenue and profit at average annual rates of about 14% and 6%, respectively, for the last six years.
In a Nov. 10 report, Global Hunter Securities analyst Mark Brown said Atwood could increase its revenue to $1.6 billion by fiscal year 2016 and its earnings before interest, taxes, depreciation and amortization to $769 million. That would mean about 40% growth from fiscal year 2014 for both numbers.
Offshore drillers are facing a challenging combination of overcapacity and falling oil prices. Atwood estimates the industry could see the addition of more than 80 floater and jack-up rigs in the next year. A prolonged weakness in crude oil prices could have an adverse impact on offshore drilling activity.
The Houston-based offshore driller is undeterred, however. Atwood recently started paying quarterly dividends of 25 cents per share. Last week, during the fourth-quarter conference call, Atwood's CEO Rob Saltiel said the company aims to grow dividends in the future, after forecasting a 10% increase in dividend distributions each year in September. This is in stark contrast to other offshore drillers such as Seadrill (SDRL) and Diamond Offshore (DO) that could lower the dividend payments in the future.
Mey explained that the company started its fleet transformation strategy back in 2010 by investing $4.5 billion in six floaters that can be used for drilling in ultra-deep-water and three jack-ups that are used in shallower water. Consequently, the company's fleet of 14 rigs now largely consists of modern and young units that can generate better day rates compared with older rigs.
Besides this advantage, Mey said that 85% of the company's fleet is contracted through 2015 and 54% through 2016. This puts the company in a strong position to face what could be a challenging future. "These [aforementioned] factors provide us with the confidence to initiate a growing dividend," Mey said, although "our dividend yield is modest as compared to most other drillers."
Atwood's shares have dropped by around 30% this year, closing at $37 on Wednesday. That translates into a yield of 2.7%. Seadrill and Transocean (RIG) , two of the biggest players in the industry, offer yields of 19% and 12%, respectively. Diamond Offshore has a lower yield of 1.4%, but it has been regularly paying at least six times as much special dividend as regular dividend since the end of 2007. That said, Mey agreed that the three industry giants are "facing the potential of dividends being cut prospectively."
Atwood isn't ignoring the current weakness in the market. The company has delayed the delivery of two new ultra-deep-water drillships by six months each. "Recognizing that day-rates are lower now and the number of contracting opportunities less prevalent, we opted to buy our marketing team a little more time to find the right contract(s) for us." Mey said.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.