Atwood Oceanics stood out. Its market cap hovered around 2 billion with a P/E of 10. It was a smaller player in an industry of Oil drilling behemoths- RIG, DO and et al. The industry average Price to Earnings ratio at the time was almost 26x. I wondered; relative to industry P/E why was this firm so "cheap"?
I began delving into the firm’s financial statements. I was looking for answers to key questions.
What is ATW’s true business?
How stable are the revenue streams and margins?
What is ATW’s competitive edge?
How competent is management?
What are the growth prospects?
What are the risks to their business?
After doing my homework I was able to answer these questions. Without being redundant (the powerpoint I produced is attached) I will summarize a couple key factors I found that made this a compelling investment.
- I found the firm had robust operating and net income margins of almost 50% and 40% respectively, that had proven stable over the time period I analyzed. The margins were extremely competitive compared to the Industry and ATW’s competitors.
- They had a substantial revenue backlog of a little more than half of their $2.2 billion market cap for the next four (4) years. Furthermore, their contracts were constructed as multi year commitments from heavy hitters that could only be broken by acts of God and featured term extension options for their counterparties.
- Most of their rig fleet was new and built specifically to compete in the most highly demanded specialty in oil drilling-deepwater and ultra deepwater rigs. These rigs were experiencing 85+% and 100% utilization rates respectively.
- I also liked that their CEO, Mr. Saltiel came to ATW from Transocean (RIG) where he was previously employed as Chief Operating Officer & Executive Vice President during multiple business cycles. There’s more but I will let my powerpoint speak for itself.