Atwood Oceanics, Inc. Earnings Continue to Feel the Weight of the Oil Market Downturn

By Matthew DiLallo Markets Fool.com

The deep and prolonged downturn in the offshore drilling sector continues to plague Atwood Oceanics (NYSE: ATW). Revenue from two of its three offshore drilling fleets has nearly dried up, while revenue from its lucrative ultra-deepwater fleet continues to sink. Furthermore, while the company has taken steps to shore up its balance sheet, its financial results do not appear to have hit rock bottom just yet.

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Atwood Oceanics results: The raw numbers

Metric

Fiscal Q1 2017

Fiscal Q1 2016

Year-Over-year Change

Revenue

$157.6 million

$307.8 million

(48.8%)

Net income

$9.7 million

$39.1 million

(75.3%)

Earnings per share

$0.15

$0.60

(75%)

Data source: Atwood Oceanics, Inc.

Image source: Getty Images.

What happened with Atwood Oceanics this quarter?

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Atwood Oceanics' working fleet is still shrinking:

  • Atwood's revenue continued to decline during the quarter because it had fewer rigs working. Not only has revenue been cut nearly in half over the past year, but sales were down 16.5% from the previous quarter. Driving that sequential decline is a big drop in revenue from its jackup fleet, which plunged from $27 million last quarter to just $2 million in the recently completed quarter. Meanwhile, the driver of the year-over-year decrease is the complete lack of revenue from its deepwater fleet, which went from $72 million in the year-ago quarter to nothing last quarter after Atwood idled its entire deepwater fleet. The only thing that's keeping it afloat these days is its ultra-deepwater fleet, which pulled in $148 million of revenue during the quarter.
  • The company has offset some of this revenue decline by cutting costs. Drilling costs, for example, were down 48.2% year over year and 12.2% sequentially. Meanwhile, Atwood has held the line on general and administrative expenses, which were roughly flat from the year-ago quarter at $15.2 million.
  • It is worth noting that earnings surged sequentially, with net income rocketing 127.6%. However, that is primarily because an asset impairment charge weighed on earnings last quarter. Not only that, but the year-over-year dip in earnings would have been even deeper if we adjusted for the fact that Atwood had a significant write-off in last year's fiscal first quarter.

What management had to say

As CEO Robert Saltiel said on the quarterly conference call:

Our financial results for the first quarter were once again aided by good cost control. As our drilling activity has declined, we have reassessed our onshore support costs to reduce the overhead burden as much as possible. Offshore, our costs continue to become more competitive as compensation and manning levels have been adjusted without impacting safety or reliability.Since our November earnings call, we have completed two transactions that have meaningfully improved our company's liquidity and balance sheet.

As Saltiel notes, the company has focused on pushing its costs down as much as possible to better match the current market environment. In fact, drilling costs were at the low end of its guidance range while sales, general, and administrative expenses were in line with guidance.

The other notable highlight last quarter was the completion of two strategic initiatives to strengthen the balance sheet. First, the company restructured its agreements with the shipyards constructing its two newbuild ultra-deepwater drillships to defer delivery by two more years. That will result in the delay of the final $250 million payment until the end of 2022. Second, it completed a secondary offering, raising more than $180 million to reduce debt.

Looking forward

Atwood needed to shore up its balance sheet due to the continued uncertainty surrounding the recovery of the offshore market. Overall, most industry watchers have a dour outlook on the offshore drilling sector in the near term. In fact, an analyst at RBC recently downgraded the stocks of Atwood Oceanics, Transocean (NYSE: RIG), Diamond Offshore Drilling (NYSE: DO), and Rowan (NYSE: RDC) because "there is still no tangible evidence, even at the margin, that offshore drilling fundamentals have stabilized." Meanwhile, a Jefferies analyst also downgraded Rowan recently due to a view that "the 'turn' in jackups and ultra-deep-water markets is likely challenged from a profitability standpoint."

However, there's much more optimism that conditions will start to improve in 2018. For example, the CEO of GE's (NYSE: GE) oil and gas unit has said that this year "is about rebuilding the backlog as you start seeing projects reemerge in the second half of 2017." He added, "We are already seeing some of our customers look at offshore, look at deepwater, and we anticipate as you go out into 2018-19 the projects will start to happen."

The hope is that oil companies will start bidding out those projects sooner rather than later so that Atwood Oceanics can begin to rebuild its contract backlog, which would give investors a better idea of when it will be able to put some of its idle rigs back to work.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Atwood Oceanics. The Motley Fool owns shares of General Electric. The Motley Fool has a disclosure policy.