IMAGE SOURCE: Atwood Oceanics
Following Atwood Oceanics' (ATW, Financial) third-quarter earnings report, is now the time to buy the stock for a long-term investor?
While the last three quarters haven't been kind to Atwood because of rapidly declining revenue, the offshore drilling contractor has seen its earnings beat estimates the last six quarters. A focus on cutting costs without ruining quality has allowed the company to adapt to the challenging offshore drilling market. With management looking to delever the company, it may be time to buy. Here's why.
The balance sheet
You could take away a few things from Atwood's earnings. To start, the company beat earnings expectations by 63 cents and missed revenue estimates by nearly $5 million. Management is confident that it can accomplish 20% to 25% net margins although Atwood management says oil needs to be in the upper $50 to low $60 range for it to have meaningful demand.
With management recognizing and taking advantage of the difficult offshore drilling environment, Atwoood has not allowed the downturn to negatively affect its reputation when it comes to operations or safety. Atwood's current long-term debt to equity sits at 43%. Its cash from operating activities as of June 30 was $199 million.
Operations efficiency is also a key factor in Atwood's success and profitability; its operations teams achieved revenue efficiency of 95% across its fleet. It's also important to note that the company plans to refinance its credit in fiscal 2018
Buying back bonds
While Atwood is not buying back stock, it is buying back bonds. Because its public bonds were trading at a discount to par, Atwood purchased $5 million of bonds at face value in June. But it is Atwood's goal to retire $150 million in face value bonds,
Still, Atwood still has capital to spend to build, consisting of delivery payments for the Atwood Admiral and the Atwood Archer, to the tune of $94 million in September 2017 and $306 million in June 2018. Atwood has been increasing its liquidity by reducing debt. But Atwood's management has been focused on strengthening its corporate balance sheet,
Demand for jackup rigs is declining, down 5% since the previous quarter with the number of idle rigs expected to grow even more. 2017 drilling contracts with ConocoPhillips (COP, Financial) will also contribute to the business' growth.
Disclosure: No position in the stock mentioned.
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