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The offshore drilling market continues to go from bad to worse. For evidence, we just need to look at Atwood Oceanics' (NYSE: ATW) deepwater fleet, which has been completely idled, with the result that the company has recorded no revenue from those vessels during its fiscal third quarter. The company did, however, partially overcome the problem by driving down costs and buying back a huge slug of its debt at a discount. And that debt buyback resulted in a hefty gain on the extinguishment of debt, which kept its earnings from sinking as deeply as they would have otherwise.
Atwood Oceanics results: The raw numbers
Data source: Atwood Oceanics, Inc.
What happened with Atwood Oceanics this quarter?
Atwood Oceanics earnings are holding up thanks to falling costs:
- Atwood's revenue sank primarily because it had to idle its entire deepwater fleet. As a result, deepwater revenue plunged from $77 million last year, and $59 million last quarter, to zero during the company's fiscal third quarter. Meanwhile, revenue from jackups was basically cut in half because of idled vessels. On a slightly more positive note, revenue from ultra-deepwater drillships rose 4.6%.
- Falling costs helped keep earnings afloat, with drilling costs plunging nearly 40%. But the company still recorded $10 million in deepwater drilling costs despite the lack of revenue, because it has to pay to idle these vessels.
- The other thing that kept earnings from taking a deep dive was the huge gain Atwood Oceanics recorded after repurchasing $145.8 million of its senior notes on the open market at an average discount of 34.8%. That move resulted in a gain of $50.5 million, or $0.55 per share, on the retirement of debt.
- After the quarter's end, the company completed a tender offer and acquired an additional $42 million in debt at a 25% average discount. The company will record another gain on the extinguishment of debt next quarter as a result. So far, the company's debt repurchases have reduced long-term debt from $1.7 billion to $1.4 billion.
What management had to say
CFO Mark Smith commented on the company's results on its quarterly conference call:
As Smith made clear, the roll-off and adjustments of rig contracts drove the revenue decline during the quarter. However, these rigs aren't likely to be going back to work anytime soon, and their idleness is expected to weigh on the company's results for the foreseeable future.
Right now, Atwood is focusing its attention on marketing just three of its rigs, because these vessels have the best opportunities to be awarded work during the current environment. CEO RobertSaltiel provided the following update on the company's marketing progress:
Filling the schedules of these rigs will provide valuable revenue at a time when offshore work is hard to find. Saltiel, meanwhile, ended his prepared remarks on the call reminding investors that the company remains "bullish on the longer-term prospects for offshore drilling, as we know that this downturn will eventually give way to recovery."
He continued: "We plan to be there on the other side with our modern, technically advanced rig fleet and our reputation for operation and safety excellence intact. In the meantime, we will take all steps to ensure that our company is positioned to get through this difficult period."
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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.