I have remained positive on Atwood Oceanics (ATW, Financial) in the past primarily on the back of its long-term contracts with solid counterparties. The company did not disappoint when it released its 1Q15 results on February 5, 2015. This article discusses the results and the reasons to remain bullish on the stock.
For the three months ended December 2014, Atwood Oceanics reported revenue of $352 million as compared to revenue of $285 million for the three months ended December 2013. The surge in revenue was backed by an increase in deep-water and ultra-deepwater rigs coupled with stable contracts for existing rigs even amidst a difficult market environment. Further, for the same period, the company reported an EBITDA of $186.2 million, representing an EBITDA growth of 39.2% as compared to 1Q14 EBITDA of $133.7 million. Even on the EBITDA margin front, there was a margin expansion of 600 basis points to 53% from 47% in 1Q14. Therefore, the overall results can be termed as stellar and I believe that the strong performance will continue through 2015.
The reason to believe that the strong performance for Atwood Oceanics will continue is the current order backlog for the company. For the remainder of 2015, the company has an order backlog of $1,072 million and this implies a quarterly order backlog of $357 million. In other words, the company’s current revenue rate will sustain through 2015. It also means that the company’s dividend payout of $1 per share will sustain through 2015 and Atwood Oceanics offers a healthy dividend yield of 3.2% at a current stock price of $32.18 per share.
The important point to note here is that Atwood Oceanics strong order backlog extends beyond 2015. In 2016, the company already has an order backlog of $1,136 million and this implies quarterly revenue of nearly $284 million that is firm for 2016. I expect the contract backlog to get stronger in the coming months and the revenue rate will be robust for 2016 as well on new contracts for existing and one new rig. The contract backlog for the remainder of 2015 is 96% while the contract backlog for 2016 is just 58% at this point of time. This backs my point on a much stronger backlog in the quarter to come. In other words, the investment horizon for Atwood Oceanics can be beyond 1 year at this point in time and as oil prices recover in all likelihood in 2016, Atwood Oceanics will be well positioned to continue with its strong growth momentum.
Another important point to mention here is that the company’s operating cash flow for 1Q15 was $195 million, and the capital expenditure for the quarter was $148 million. I believe that the company’s free cash flow will improve in the coming months considering the fact that the company has a capital expenditure of $420 million for 2015 and $415 million for 2016. With a bulk of the capital expenditure cycle over, the free cash flow will increase and this will also improve the prospects for higher dividends as the overall market conditions improve.
In conclusion, Atwood Oceanics is an excellent stock to consider with a time horizon of 2-3 years and the company’s modern fleet, strong cash flows, strong order backlog and a very manageable debt makes the stock attractive at current levels. The stock has trended higher after 1Q15 results. However, I expect further rally in the coming quarters and these levels are attractive for long-term exposure.
