Thursday, February 7, 2008

Earnings Update on Our 2 Drillers: Atwood Oceanics (ATW) and Diamond Offshore (DO)

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I lightened up on both these deep sea oil drilling names yesterday heading into today's earnings because... quite simply, if you open your mouth you get sold in this market.

Atwood Oceanics (ATW) reported after the bell and this could be the shortest earnings press release I've seen in all my years... I assume the rest was not transmitted across the press wire, but from what little we have they have a nice little beat - $1.20 vs analyst $1.16
  • The Company earned net income of $38,549,000 or $1.20 per diluted share, on revenues of $111,048,000 for the quarter ended December 31, 2007, compared to net income of $21,085,000 or $0.67 per diluted share, on revenues of $88,800,000 for the quarter ended December 31, 2006.

And that's about the extent of the release.... no really. :) So we have nice solid 50% top line growth year over year, and 80-90% type of earnings growth, and the stock trades at 12x 2008 estimates. This is what is frustrating about the oil drillers. They are seen as cyclical (even the deep sea type) and hence get the terrible multiples. And when oil falls, they fall - even if they have long term contracts in place that don't care if crude is $65, $85 or $105. Same old story.

Diamond Offshore (DO) reported this AM and was hurt a bit by its jack up rigs (those that are in shallower water) so it sold off a bit today, but not too bad - 3%. A tax issue (1x) made the numbers a bit difficult to get to, but overall it was not bad. Jack up rigs are less than 15% of revenue but still it was enough to offset the 85% of "good" in the deep sea oil business. (Which is the part I like). They did declare a nice one time dividend it appears.

  • Diamond Offshore Drilling Inc. posted a sharp drop in fourth-quarter profit as a one-time tax charge and other expenses offset revenue gains.
  • The company's intermediate submersibles division reported the biggest gains in operating income, while its jack-up rig business saw its operating income sliced nearly in half. Many had been expecting weak jack-up rig results across the industry as overcapacity led to lower demand and pricing.
  • However, Diamond's full-year results improved, with profit rising nearly 20 percent to $846.5 million, or $6.12 per share, from $706.8 million, or $5.12 per share. Its revenue rose by a quarter to $2.57 billion from $2.05 billion.

DO is a larger animal than Atwood so it's growth is not quite as swell, but still ... it now traded at under 10x 2008 estimates (now in the case of these drillers with the issues in the jackup market, 2008 estimates might need to come down across the board). So the stocks are probably a tad more expensive than they look but again even if 10-12x estimates really is 12-14x, these companies still are growing 25-35% and have no exposure to the US consumer, subprime, etc. But when oil sells off, these sell off - thats the depth of the analysis.

Anyhow these names are on the backburner as we had another day of people chasing retail, homebuilders, and subprime slime infected financials on the "Fed cuts solve everything and if not, well the playbook says to buy these stocks anyhow so our computers are programmed to do it". So I managed to own 5 out of 6 Ultrashorts that all lost money today - so much for hedging risk. (they did come handy the first 3 days of the weak when some logic ruled).

This market is so bipolar right now. Last week these same "Fed saves everything" groups were flying, the past 3 days they tanked, and today was another great day for them. Attitudes chang daily if not hourly. While groups with zero subprime exposure or financial issues are getting sold off. It looks like we are going to have this internal struggle on and off for quite a while judging by the past few days and weeks. No rhyme. No reason.

Long Diamond Offshore Drilling, Atwood Oceanics in fund; no personal position



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