ATW - Atwood Oceanics

[watsa_is_a_randian_hero]

ITT we discuss ATW

 

The company has an outstanding track record.  They have consistently outperformed their peers in return on capital, margins, and stock price appreciation.  Heres the play - they have significant newbuilds contracted that will be delivered over the next 2-3 years.  These newbuilds are expected to increase EBITDA by about 150%. about 40% of the costs for these newbuilds have already been deposited.  The market doesnt seem to be giving credit to them (or is assigning a high degree of risk that they will be placed at attractive rates).

 

They company is selling for about 3.5x the EBITDA it will achieve 3 years from now.  In addition, it has a 2.2billion backlog under contract currently, which is the equivalent of 1.0 billion after tax cash flow at current margins.  Essentially, the current backlog can fund almost all of the remaining capex under its newbuild program.  The remaining amount could be funded either from cashflows outside of the current backlog or by drawing modestly on existing credit facilities.

 

The company's balance sheet does have debt on it...total net debt is about 1x ebitda.  however, there is enough cash to fully cover existing revolver balances, and the only outstanding notes are not due until 2020, well after the newbuilds will be received.

 

I have owned it before; I bought around 25 a couple years ago and sold out around 45 a little over a year ago.  Its become attractive to me again.  would represent excellent inflation protection.  Running a DCF on it, it is fairly easy to get to valuations of 60+.  In fact, to justify current price levels, you have to haircut median 2015-2016 revenue forecasts a good deal, and assumption margins trend back to historical levels (even though it is likely they will remain elevated for sometime with a very young fleet).

 

I think the main reason for the misvaluation in the market is impatience regarding the newbuild program; nobody wants to buy a stock that will not have a catalyst for 2-3 years.  If one looks only at current EBITDA, it does not look that unreasonable.  However, one indication that the market is undervaluing the newbuild program would be to look at P/TBV ratios, which are very low relative to historical levels.  This is because all of the downpayments for the newbuilds are being capitalized, adding to TBV, but the stock price doesn't seem to be fulling appreciating the increase in earnings that this will eventually result in.

[beerbaron]

Thanks, will try to find some time to investigate this weekend. I certainly like the raw numbers.

 

BeerBaron

[Myth465]

I have bout ESV at similar points. Will have a look at ATW, thanks.

[watsa_is_a_randian_hero]

So I posted on ATW originally almost 2 years ago.  Since then ATW has outperformed most or all of its comps (such as RIG, DO, ESV, NE, etc), but underperformed the S&P 500. 

 

http://finance.yahoo.com/echarts?s=ATW+Interactive#symbol=atw;range=20120605,20140129;compare=rig+do+%5Egspc+esv+ne;indicator=ema+volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

 

I have been buying more recently.  ATW is trading at a PEG of 0.36x, very cheap growth story.  The story is much the same as I posted originally (large newbuild program undervalued by the market because the market is short-term focused).  ATW is now trading at a P/TBV of near 1.35x, or 1.3x once you include this Q's soon to be reported numbers.  They haven't traded at an average P/TBV for a full year that low since 1995. 

 

ATW is a best-in-breed with higher growth, efficiency, and margins than its competitors with on average a more specialized younger fleet.  The newbuild program is 60-70% paid for already, with remaining costs completely fundable out of contracted revenue.  Contracted revenue at this point is over $3 billion (roughly equivalent to current market cap).  EV/contracted EBITDA is about 2.5.

 

[edit] Also, not that this matters for much, but they've beat guidance (on a gaap basis) for 7 straight quarters since I recommended.  RIG's only managed to beat 1 quarter, the other comps missed on a gaap basis in the recent quarters. 

[DCG]

ATW is trading at a PEG of 0.36x, very cheap growth story. 

 

 

While I am generally pretty big on PEGs, I've found them tough to rely on for oil companies, as their future growth is often dependent on oil prices, which are tough to predict.

 

 

Companies like RIG still had PEGs around 0.30 at the top of the oil bubble in 2007.

[watsa_is_a_randian_hero]

ok, so don't rely on the PEG.

 

rely on the EV/contracted EBITDA of about 2.5x, the 50%+ ebitda margins, the outperformance of peers on almost every metric, the 18 year low in terms of P/TBV (looking at each year's average P/TBV). 

[bz1516]

So I posted on ATW originally almost 2 years ago.  Since then ATW has outperformed most or all of its comps (such as RIG, DO, ESV, NE, etc), but underperformed the S&P 500. 

 

http://finance.yahoo.com/echarts?s=ATW+Interactive#symbol=atw;range=20120605,20140129;compare=rig+do+%5Egspc+esv+ne;indicator=ema+volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

 

I have been buying more recently.  ATW is trading at a PEG of 0.36x, very cheap growth story.  The story is much the same as I posted originally (large newbuild program undervalued by the market because the market is short-term focused).  ATW is now trading at a P/TBV of near 1.35x, or 1.3x once you include this Q's soon to be reported numbers.  They haven't traded at an average P/TBV for a full year that low since 1995. 

 

ATW is a best-in-breed with higher growth, efficiency, and margins than its competitors with on average a more specialized younger fleet.  The newbuild program is 60-70% paid for already, with remaining costs completely fundable out of contracted revenue.  Contracted revenue at this point is over $3 billion (roughly equivalent to current market cap).  EV/contracted EBITDA is about 2.5.

 

[edit] Also, not that this matters for much, but they've beat guidance (on a gaap basis) for 7 straight quarters since I recommended.  RIG's only managed to beat 1 quarter, the other comps missed on a gaap basis in the recent quarters.

 

What do you think of warnings of market weakness by RIG, SDRL and Norwegians specifically citing increased supply from shale?

[watsa_is_a_randian_hero]

Potential future day rate weakness/over supply is the obvious risk industry-wide.

 

Here are my responses to that:

 

1. 3 billion on contracted revenue (at 50%+ EBITDA margins thats 1.5 billion in contracted EBITDA) on a 4bl EV...the risk is more than priced in to the stock, almost no credit for uncontracted future revenue, implies margins will get crushed in the future.

2.  ATW is best in breed and a better buy opportunity IMO; if you could hedge if you wanted to.

3.  Oil spot and future prices have held steady over the last year despite oversupply concerns

4.  On the one hand oversupply is a concern, on the other hand inflation should also be a concern.  Years of low interest rates & printing money, the employment market is finally catching up, & proposals for easing immigration paths could all be inflationary.  ATW offers inflation protection.

[HJ]

I think the fear is that we are on the front end of a replay of 1992 - 2003 with regard to offshore drilling.  It is true that the oil price macro is much better this time around, however offshore drilling is driven more by E&P and oil major's drilling intention, not oil price, and that could have peaked in the intermediate term, relative to the equipment that has been or will soon be brought on line.  The bad thing about this space is that these are equipment built for 30 years.  Once built, capacity doesn't go away.  And when you have an aggressive guy like John Fredrickson, who brings on equipment based on the contracted revenue in the first couple of years, or even speculatively build, you get into an overcapacity situation very quickly.  This business has been enjoying great margin for a good decade by now.  Are we looking at a down decade ahead?

 

 

[Guest Schwab711]

I think the fear is that we are on the front end of a replay of 1992 - 2003 with regard to offshore drilling.  It is true that the oil price macro is much better this time around, however offshore drilling is driven more by E&P and oil major's drilling intention, not oil price, and that could have peaked in the intermediate term, relative to the equipment that has been or will soon be brought on line.  The bad thing about this space is that these are equipment built for 30 years.  Once built, capacity doesn't go away.  And when you have an aggressive guy like John Fredrickson, who brings on equipment based on the contracted revenue in the first couple of years, or even speculatively build, you get into an overcapacity situation very quickly.  This business has been enjoying great margin for a good decade by now.  Are we looking at a down decade ahead?

 

I think ATW can produce positive net income at ~$450m revenue and positive FCF at ~$550m sales, assuming 60% GM and maintenance CapEx 50% of total CapEx. They should be able to survive a sustained rev decline of ~55% (maybe 2-3 years) which would see them surviving a 92-03 event. The stock may trade much lower if this occurs. You could adj the rev projections up if you think mCapEx is higher or GM% will be lower since most rigs will be idling. Hopefully they will use the proceeds of scrapping their older rigs to pay off some debt. Minimum revenue needs to be ~$100m higher to continue to cover the current dividend, which they'll probably prioritize (I think I'd be more interested if they didn't pay the dividend).

 

Anyone interested?

[Guest Schwab711]

I'm going to regret passing on ATW when I look back in a few years. I really wish they'd cancel the dividend now before they are forced to.

[undervalued]

Wouldn't DO be a safer investment considering Tisch's ownership? I think that was the same logic that Walter Schloss used when buying CFA during the financial crisis.