Atwood Oceanics Inc. Defies the Odds As Results Squeak Past Estimates

Atwood Oceanics reported its fiscal third-quarter results after the closing bell on Wednesday. The offshore driller beat analysts' estimates on both the top and bottom lines, as it was fueled by solid results from its Ultra-Deepwater and Deepwater drilling segments. That said, both numbers were down sequentially, and with an expiring contract on the horizon, it could lead to additional declines later this year.

A look at the numbersAtwood Oceanics reported revenue of $330.6 million, roughly $3 million more than analysts were expecting. While that was well above the $292.8 million the company brought in during the year-ago quarter, revenue did decline sequentially from the $350.4 million it reported last quarter.

Earnings were a carbon copy, as they were higher year over year and beat estimates but did decline sequentially. For the quarter, the company reported net income of $113 million, or $1.73 per share, which was $0.07 per share better than analysts were expecting. Earnings were also much better than the same quarter of last year, when the company earned $1.11 per share. That said, earnings declined sequentially from the $1.89 per share Atwood earned last quarter.

Driving the year-over-year revenue growth was the company's Ultra-Deepwater segment, as the addition of the Atwood Achiever to its fleet pushed that segment's revenue up from $118 million to $174 million. Also stronger was the company's Deepwater segment, as revenue increased 10% year over year to $77 million. Meanwhile, segment revenue for both fell sequentially, while revenue in the Jackup segment was down both year over year and sequentially.

It's worth noting that it was the company's Deepwater segment that drove the better-than-expected profitability. The segment's drilling costs plunged year over year from $52 million in the year-ago quarter to just $29 million this past quarter. That performance helped to mitigate some of the cost pressures in the Ultra-Deepwater segment, as drilling costs spiked not only year over year but also sequentially.

A look at the outlookAs we look ahead to the rest of the year, most of Atwood Oceanics' revenue and earnings are locked in thanks to its strong contract backlog:

Source: Atwood Oceanics investor presentation.

As that slide shows, nearly all of the company's fleet is under contract. The only concern for the balance of 2015 is that one of its jackups, the Atwood Mako, is running at the end of its contract. The company has yet to announce a new contract for that vessel, so it's assumed it will be idled once its current contract is complete, probably leading to additional revenue and earnings declines for the company for the balance of this year.

Further, the company doesn't yet have a contract for the Atwood Admiral, which it has delayed receiving delivery on and will probably delay further if no contract can be found. That vessel was supposed to drive revenue and earnings growth in 2015, much as the Achiever has done, but that growth is being pushed out because of the weak offshore drilling market. Meanwhile, the company has several vessels with contracts that expire next year, which suggests that revenue and earnings could slide for a while unless the offshore-drilling market begins to improve.

Investor takeawayAtwood Oceanics delivered another stronger than expected quarter. However, the company is starting to see some damage from the stormy oil market. Not only will its 2015 financial results probably deteriorate further because of a looming contract expiration, but it also has several more contracts set to expire next year. Suffice it to say that earnings could be in for a bumpy ride until the oil market begins to rebound.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Atwood Oceanics. The Motley Fool owns shares of Atwood Oceanics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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