Atwood Oceanics: Deepwater Dollars

08/13/2013 7:00 am EST

Focus: STOCKS

Charles Mizrahi

Editor, Park Avenue Investment Club and Inevitable Wealth Portfolio

This global offshore drilling contractor, engaged in the drilling and completion of exploratory and developmental oil and gas wells, has produced record earnings and revenues, notes Charles Mizrahi, editor of Hidden Values Alert.

We continue to like this stock because of strong demand. Oil exploration and drilling has increasingly looked offshore as a source of reserves in recent years.

Companies rely on third party contractors, such as Atwood Oceanics (ATW) to provide rigs in these deep-water environments. High utilization rates have resulted in rig shortages, creating upward pressure on prices. Atwood's largest customers include Chevron (Australia), Noble, and Kosmos Energy Ghana.

ATW has benefited from increased lease rates as a result of the surge in demand. The company's utilization rate in 2012 was 100% with a 95% average over the last ten years. Its growth strategy over the next several years involves building new rigs to meet growing demand for their services.

Meanwhile, the company has a long-term focus. Management is content on sacrificing short-term cash flows to focus on the bigger picture.

The company has invested more than $2 billion in capital expenditures over the past five years, to sustain its growing fleet of offshore drilling units. ATW recognizes the potential in the industry as companies expand their offshore and deepwater drilling operations.

The nature of ATW's contracts also exhibits an emphasis on long-term commitment. Deepwater rigs generally enter into multi-year contracts ranging from three to six years.

This backlog locks in earnings and generates a consistent revenue stream. These recurring revenues allow the company to withstand the cyclical trends of the industry.

The company produced record sales in 2012 at $787 million. ATW also posted record figures in net income at $272 million. This represents a 34.5% profit margin. With earnings locked in over the next few years in the form of multi-year contracts, similar results can be expected going forward.

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