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Founded in 1968, Atwood Oceanics (ATW) has headquarters in Houston and maintains offices in Australia, Malaysia, Singapore, and the United Kingdom. Its focus is on international offshore oil drilling, where 97% of its revenues were derived from international business in each of the past three fiscal years. (Fiscal years end September 30th.) From fiscal 2007 to 2011, revenues rose 60% from $403 million, to $645 million, while earnings increased 90% from $2.18 to $4.15 per share as the company’s fleet grew from eight to 10 rigs. At present, Atwood markets seven of its rigs; three are cold stacked and would require some time and money to return to service.

Atwood’s seven currently marketed rigs include four deepwater semi-submersibles, with water depth ratings of 5,000 to 8,000 feet, and three jackups. The semisubmersibles are working on contracts with day rates from $340,000 to $530,000, and the jackup contracts range from $90,000 to $135,000 a day. The four deepwater rigs are fully committed for fiscal 2012. Attwood’s rigs are currently working in Australia, Malaysia, Ghana, Equatorial Guinea, Cameroon, and Thailand. Major customers in 2011 included Chevron (CVX - Free Chevron Stock Report), Shell (RDA), and Kosmos Energy (KOS), accounting for 75% of total revenues.

Attwood’s newbuild program provides the sizzle to its story. The company has three ultra deepwater rigs and three high-specification jackups under construction. The ultra deep rigs include two drillships that can drill in 12,000 feet of water and a semisubmersible rig rated at 10,000 feet. The semisubmersible is on contract with Hess (HES), for $514,000 a day, starting in June 2012, while the two drillships are still not under contract; one is to be delivered in September 2013 and one in June 2014. The jackups are scheduled for delivery in September and December 2012 and June 2013. Under good circumstances (present dayrates and slightly better than present operating margins and utilization), Attwood forecasts that the six newbuilds would add about $4.30 a share to earnings in 2015. The six new rigs will need about $2.5 billion to complete, a sum that Attwood can easily afford, given its moderate 25% debt-to-capital ratio, if earnings hold up.

In response to high oil prices, oil companies are expanding offshore drilling plans, and more rigs are under construction. About 65 ultra-deepwater rigs will likely be delivered by 2015 and perhaps the same number of jackups. At this point, though, it appears that rising demand for oil from emerging economies like China and India will lead to enough additional drilling activity to absorb the extra capacity. In Brazil, Petrobras (PBR) has announced a very ambitious program to lift oil production to five million barrels a day; that will require more equipment than the country can produce. And well permitting in the U.S. Gulf of Mexico has largely recovered from the April 2010 Macondo well explosion and the resulting tighter drilling regulations. Moreover, Attwood’s two newbuild drillships are well designed to pierce the salt layers that overlie oil deposits in much of the Gulf.

Demand for drilling services has been cyclical, leading to dramatic swings in dayrates. But, historically, demand for deep and ultra deepwater rigs has been more stable, given the high cost and long-term nature of these operations. While another deep recession would reduce demand for rigs for a while, it would probably return in a short time. Too, as a small participant, Attwood Oceanics would be a good acquisition candidate for a bigger driller, such as Noble (NE), Rowan (RDC), Ensco (ESV), or Diamond Offshore (DO).
   
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.