Atwood Oceanics – Value Play or Value Trap?

Extract from its latest filing on industry conditions in May 2017

The offshore drilling industry remains in the midst of a very severe downturn that began in the second half of calendar year 2014. Since that time, the industry has experienced declining demand for drilling rigs that has been exacerbated by a sharp decline in oil prices. E&P companies generally reduced their offshore capital spending in 2015 and 2016 by canceling or deferring planned drilling programs, and this trend is expected to continue into the second half of calendar year 2017. Since declining to multi-year lows below $30 per barrel in early 2016, Brent oil prices recovered modestly during the latter part of 2016 and ranged between $50 and $55 per barrel in April 2017. However, we expect offshore rig demand to continue declining during the first half of calendar year 2017 and potentially beyond, as offshore rigs complete existing contracts at a faster rate than new drilling programs are initiated. Declines in offshore drilling demand and the associated reductions in rig utilization and day rates could materially and adversely affect our financial position, results of operation or cash flows. See “Our business depends on the level of activity in the oil and natural gas industry, which is significantly impacted by the volatility in oil and natural gas prices” under “Risk Factors” Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.
Even as offshore rig demand declined from the peak levels in calendar year 2014, some drilling contractors continued to take delivery of new, more capable rigs that were ordered prior to the industry downturn. However, over the past year drilling contractors have generally delayed further rig deliveries, especially for uncontracted rigs, through renegotiation of terms with the shipyards that are constructing these rigs. Due to the confluence of an oversupply of offshore rigs and declining rig demand, a lower percentage of marketed rigs are being re-contracted, and day rates and utilization have declined sharply across all offshore rig classes. While clients generally prefer newer, high specification rigs over older, less capable rigs, many newer floaters and jackups have been idled or cold-stacked as drilling demand has declined across all regions, water depths and rig classes. The bifurcation trend of higher utilization rates for newer, more capable rigs has been generally muted, but has been maintained more consistently for floaters than for jackups.
Due to the uncertain duration of the current industry downturn, a growing number of older, less capable rigs have been permanently removed from the marketed supply of rigs by virtue of being scrapped, announced for scrapping, or cold stacked.
There are a few key risks highlighted as below:
  • Offshore drilling industry severe downturn. Even though there are less floaters and jackups, the supply still exceeds demand
  • Reduction in rig utilization
  • Decrease in day rates

In the latest reports, Atwood has

  • Negative operating income
  • Issue new shares to raise capital ( jump from 64M to 80M)
  • Issue new debt to finance
  • Considerable depreciation expenses

In its May 17 Fleet status:

  • The day rate for well in progress is lower than the contract day rate and is not disclosed.
  • Deep water semisubmersible scraped
  • 4 out 5 jackups are idling
  • One out of two ultra deep water semi-submersible is idling in the period Sep 17 to Mar 18
  • Current fleet utilization is about 50 percent

Metrics based on gurufocus:

  • Net cash value:  -11.93
  • Net current asset value: -9.46
  • Tangible book value 42.24
  • Days inventory increased from 104 to 140 from 2016 to 2017

For value play, most look at the tangible book value. But from above, we can see many risks involved and I have doubts about the tangible book value as many of the company assets can’t be sold at the market price with the current downturn and that might look like it will stay for a couple of years with the depressed crude price.

Hence, ATW is a value trap and I would short it if it reaches above $12.

Disclosure: I do not hold any positions on ATW.

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