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MLGtrader (32.14)




February 22, 2009 – Comments (14) | RELATED TICKERS: ATW , RIG , NE

Just did research on the industry. Note industry pe is in the 3.5 to 5 range and they are all trading at book value, which makes them seem cheap. If you dig a little deeper, you will see why. ATW, RIG, NE are the companies I looked at. They all own oil rigs and lease them out to companies (or people) who own ocean oil under the sea.

I really like this sort of business because it makes so much sense. They just rent their assets to companies, perform maintenance, and find people to rent them. Oil demand and prices have been deteriorating away in recent months as the recession worsens. Inventories are piling up and companies are trying to stop pumping because the price is so low. This all sounds like horrible news for the companies who rent to the people who drill and it is.

The catch is that these companies all have lease contracts on their rigs usually spanning a few years. This is great news for the companies that have contracts locked up far into the future because they can just rake in the same profits at when there was peak oil for a few more quarters.

I looked at the lease contract for these oil rig owners on their quarterly reports.

ATW has 80% of its contracts spanning through 2011.

NE has 60% of its contracts going through 2009 and 40% of its contracts through

2010 RIG did not give numbers on this which I don't like at all

The recent quarterly earnings reports reflects these contracts. ATW doubled YOY earnings. NE showed strong double digit earnings growth and RIG's YOY earnings were significantly lower.

The future lease contracts are the most important thing to look at when investing in oil rig companies. As a conservative investor, I don't expect any new oil rig contracts to be signed in 2009 and few in 2010 because of the deteriorating economy and huge current oil inventories. I forecast my future earnings based on currently signed contracts only.

ATW talks most about their contracts and gives the most financial clarity hands down. They claim that their contracts are very safe from cancellations because oil companies are generally in good financial shape and their contracts don't give room for backing out due to weak oil markets.

My conclusion, all rig companies are priced at about the same ratios, so I value ATW above the rest because of their strong lease contracts.

Forward pe for ATW through 2010 using these assumptions is around 5, which I think is very reasonable.

14 Comments – Post Your Own

#1) On February 22, 2009 at 3:36 AM, PrestonCheek (31.28) wrote:

Good information, thanks.

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#2) On February 22, 2009 at 4:10 AM, CoastalTrader (97.05) wrote:

The location of the contracts is also an important factor.  Nigeria seems to be scaling back.  Mexican contracts are pretty solid.

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#3) On February 22, 2009 at 11:40 AM, BigFatBEAR (28.45) wrote:

Nice post, MLG. I've been wondering about rigs recently, and this is good stuff to hear...

NE has been on my watchlist for a while, but I might have to sub it out for ATW. 

Do keep us posted!

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#4) On February 22, 2009 at 12:21 PM, Bays (29.15) wrote:

Have you had a chance to look at DO?

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#5) On February 22, 2009 at 1:02 PM, RainierMan (63.55) wrote:

Barrons had a related article recently (I think last week's issue, not current issue), which was interesting. They focused on one company that I am not familiar with (and cannot remember the name), that is particularly well positioned on the leases. Maybe someone else saw it. I can dig a bit if anyone is terribly interested.

Good blog. Thanks. 

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#6) On February 22, 2009 at 3:28 PM, MLGtrader (32.14) wrote:

Costal Trader- why is the location so important?  Isn't it more important whether the contracts are backed by safe companies?  You can look on the companies' websites to see a cool little map of where the rigs are located.  ATW has 4 in Asia area, 2 in Africa, 1 in Europe, 1 in the US.

BFB-  NE actually looked appealing as well.  The company is buying back shares now.  The got them for under $21 which is excellent timing, which I always like to see in buybacks.

Bays- I have not looked at DO yet.  I'll try to sometime and report back.

MichaelinWA - It would be nice to know what Barrons think about offshore.  If they found a company with strong contracts, I would like to know which it is.  Thanks

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#7) On February 22, 2009 at 3:35 PM, YooCanFly (29.20) wrote:

While you take a look at DO, also check out ESV, I was debating between ESV and NE, and went with ESV

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#8) On February 22, 2009 at 4:23 PM, CoastalTrader (97.05) wrote:

The location is an important factor because despite claims that the leases are "secure" this is not always the case.  If you think that those leases represent money already in the bank you are liable to be disappointed.  Programs get  postponed and cancelled. I am in the industry --- I know.  I have witnessed the downturns firsthand.

Having said that, ATW is primarily (if not exclusively) DEEPWATER rigs. This is PROBABLY a good thing for rigs that are working. The initial startup costs are immense and to my way of thinking this would tend to discourage second guessing (taking rigs offhire).  But it does happen.

Low oil prices discourage new development.  The good news is that the industry, like the market is somewhat forward looking.  If your company has good financials then I would say now is as good a time as any to get in.  Everything is on sale.

Some places are different.  Like Mexico where I work. Here, PEMEX seems commited to going forward with new projects and are strongly motivated to do so. Their production is down and they need new fields.  Other places may not be similarly motivated (Nigeria). I know very little about Asia.

Go to ATW's website, investor relations, SEC Filings, 10-K from last November.  Read the risk section.

In conclusion, all I am saying is that location of the rig and it's customer/government is an important factor when it comes to the durability/security of a given contract.

For the record, I am long USO, TDW, VLO, NOV and XTO. I am a captain for TDW in Mexico. Do your own DD and happy returns.

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#9) On February 22, 2009 at 4:50 PM, MLGtrader (32.14) wrote:

Thanks for the insight.  It is always great to find people on caps who work in the industries you are investing in.  When you talk about location being important, do you mean it is important for new contracts?  Because ATW said that their currently signed contracts don't give room for cancellation due to poor market conditions.  Wouldn't a contract breach mean they could collect in a lawsuit unless the company has financial troubles?  I know that new projects and contracts are highly dependent on location.  One more thing, can't the rigs move?  If the business is hot in Mexico, couldn't they just sign a contract and have the rig moved to Mexico?  Thanks Costal Trader.  I really appreciate the comments.

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#10) On February 22, 2009 at 5:34 PM, CoastalTrader (97.05) wrote:


MGLtrader asked, "Because ATW said that their currently signed contracts don't give room for cancellation due to poor market conditions."

I can't possibly know the specifics about this. I can't comment on the iron-clad nature of an unseen contract. I did not see this statement. I would however, take that statement with a healthy handful of salt.  It is difficult to imagine that there would be no outs of any kind in the contract. The 10-K risk statement would seem to be in conflict. I meant new and EXISTING contracts.  There is no such thing a sure thing.

This from their Overview:

"Risk Factors

Except for the historical information contained here, some of the matters discussed in the Web site are forward-looking statements, based on current expectations, that involve risks and uncertainties that could cause the Company’s actual future activities to be materially different from those suggested or described in the Web site. These risks include: the Company’s dependence on the oil and gas industry; the Company’s ability to secure adequate financing; the risk involved in the construction and upgrade of the Company’s rigs; competition; operational risks; risks involved in foreign operations; risks associated with possible disruptions in operations due to terrorism, and governmental regulation and environmental matters.

These and other risks are detailed from time to time in the Company’s Securities and Exchange Commission reports, including but not limited to the report on Form 10-K for our most recent fiscal year ended September 30."

Legal remedies might be available.

It all comes down to faith really.  You can reasonablly be assured that ATW has done the best they can to protect themselves.

Yes. Rigs are movable and they move all the time.

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#11) On February 22, 2009 at 6:10 PM, EnigmaDude (51.62) wrote:

Good stuff.  Do you have any thoughts on PDS?  The market has beaten them up pretty bad - is it deserved?

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#12) On February 22, 2009 at 6:51 PM, Bays (29.15) wrote:

Thanks MGL.... ill keep following this blog.... and yes PDS has taken a beating... havent had time to look into that one either.

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#13) On February 22, 2009 at 7:07 PM, CoastalTrader (97.05) wrote:

MGL, you did some good work here, and got me interested enough that I took a little closer look.  NE vs. ATW they look very similar across the board on the financials except for the market cap.

It looks to me that you would be OK with either one, and might have a real small cap winner with ATW as long as they make it through the downturn OK.

As far as price goes I think you need to look into your crystal ball to see what oil does short term.  Pretty decent prices right now though.

I can say that Noble (NE) has a pretty big presence in.......................

Mexico....all shallow water though.

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#14) On February 22, 2009 at 9:53 PM, rd80 (95.48) wrote:

"2010 RIG did not give numbers on this which I don't like at all"

 Transocean puts out a monthly fleet status update.  You can see the break-out of contracts by individual rig.

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