Atwood Oceanics drills for deepwater dollars
Multiyear contracts provide this oil services company with consistent long-term earnings and revenues.
By Charles Mizrahi, Hidden Values Alert
Atwood Oceanics (ATW) is a global offshore drilling contractor. We continue to like this stock because of strong demand for its services.
Oil exploration and drilling has increasingly looked offshore for a source of reserves in recent years. These companies rely on third party contractors to provide rigs for these deep-water environments.
High utilization rates have resulted in rig shortages, which created upward pressure on prices. Atwood's largest customers include Chevron (Australia), Noble, and Kosmos Energy Ghana.
ATW has benefited from increased lease rates as a result of the surge in demand. The company's utilization rate in 2012 was 100% with a 95% average over the last 10 years.
Its growth strategy over the next several years involves building new rigs to meet the growing demand for its services.
Meanwhile, the company has a long term focus. Management is content with sacrificing short-term cash flows to focus on the bigger picture.
The company has invested more than $2 billion in capital expenditures over the past five years to sustain its growing fleet of offshore drilling units.
The contracts for deep-water rigs are generally multiyear contracts, ranging from three-six years. This backlog locks in earnings and generates a consistent revenue stream. These recurring revenues allow the company to withstand the cyclical trends of the industry.
The company had record sales in 2012 of $787 million. ATW also posted record net income of $272 million. This represents a 34.5% profit margin.
With earnings locked in over the next few years in the form of multiyear contracts, similar results can be expected going forward.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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