Atwood Oceanics has $702 million liquidity, no near maturities, will seek covenant changes

By Paul Deckelman

New York, Feb. 3 – Atwood Oceanics, Inc. ended the 2016 fiscal first quarter with $702 million of total liquidity, a sum that the Houston-based offshore energy drilling contractor believes is sufficient to run its business and service its debt – as long as it has access to its revolving credit agreement.

However, given the current difficulties facing the energy industry in the form of lower oil and natural gas prices – which translates to reduced business for service companies like Atwood – the company’s executives said Wednesday that Atwood would be working with its lenders on modifying the covenants in its credit agreements to make certain that it remains in compliance with those requirements and able to draw on its $587 million of availability under that $1,547,000,000 revolver.

Talking with the banks

“Given the uncertain timing of our industry’s recovery,” Atwood’s chief executive officer and president, Robert J. Saltiel, told analysts on its conference call following the release of results for the fiscal first quarter ended Dec. 31, “we also recognize that there’s a risk that the covenants on our revolving credit facility could be stressed at a lower point in the cycle in late fiscal 2017, potentially limiting our access to these funds.

“As a result, we are maintaining regular communications with our lead banks for the facility, and recent discussions are signaling a growing flexibility regarding covenant modifications, as this issue becomes widespread across our industry.”

Saltiel pointed out that under the terms of the agreement, “we require only a greater than 50% approval from the lending group to affect a covenant change. We definitely want to eliminate any concerns about covenant compliance, and we hope to announce a resolution before our next earnings call” following the end of the current fiscal second quarter on March 31.

Atwood’s chief financial officer and senior vice president, Mark W. Smith, added that “we believe we will have full access to this [revolver] availability, as we are currently in compliance with our covenants and project to remain in compliance through the remainder of this fiscal year and well into fiscal 2017.”

However, he said, “our leverage covenant – which measures the ratio of net debt-to-EBITDA on a rolling four-quarter basis – is likely to become more challenged late in 2017, as more of our rigs are either idled or roll into contracts at current [lower] market rates.”

While acknowledging that such a possibility at this point “is more than six quarters away,” Smith said that “we are in constant communication with our bank group to discuss the strategies to manage covenants through the remainder of this down cycle.”

Liquidity is ample

As of the end of the fiscal first quarter, Smith said, the company’s net debt stood at $1.61 billion, an increase of $79 million over the year-earlier quarter. It had $115.67 million of cash on hand, up from $113.98 million a year earlier.

Atwood had $960 million of outstanding borrowings under the revolver, leaving $587 million of availability, resulting in $702 million of liquidity at the end of the quarter.

Smith said that “assuming cash is constant and the guidance provided is realized, we project at least $700 million available liquidity through the end of the fiscal year” on Sept. 30.

Saltiel told the analysts that Atwood’s balance sheet gives the company “a good degree of cushion within our debt structure to weather this downturn. One big positive for Atwood is that we are insulated from near-term refinancing risks for our two main sources of debt – our revolving credit facility and our unsecured bonds.”

The capital structure includes $650 million of outstanding 6½% notes due 2020, which it issued in June of 2013. The notes became callable on Monday of this week at a price of 103.25.

Saltiel said that the credit facility, meanwhile, does not mature until May of 2019, “and based on our financial modeling, we should have ample capacity under this revolver” – inclusive of making the final capital payments on two drillships currently under construction in South Korea – “up until the point when we refinance the facility, in mid-calendar 2018.

“Thus, we believe we have ample liquidity and see no requirement to raise additional funds, as long as we have access to our credit facility.”

Two ships delayed

In order to preserve cash and boost its liquidity during the current unsettled market conditions, the company in late December amended its construction agreements with Daewoo Shipbuilding & Marine Engineering Co., Ltd., the Korean company building its two drillships, the Atwood Admiral and Atwood Archer.

Smith said that “we negotiated the ability to further delay the delivery of the Atwood Admiral and the Atwood Archer by an additional year each, to Sept. 30, 2017 and June 30, 2018, respectively.” This, in turn, adjusted the remaining milestone payments owed by Atwood to DSME to $94 million on the Atwood Admiral and $306 million on Atwood Archer, which will now be due at their respective new delivery dates, after Atwood pays $50 million on each rig at the end of the year.

CEO Saltiel said that “these amendments allowed us to defer nearly $200 million in milestone payments that would have been due in the first two quarters of this fiscal year, but that are now due upon the delivery of these rigs to Atwood.”

The net effect, he said, “is increased liquidity, reduced near-term debt and a better match between the capital payments and each rig’s contribution to revenue and earnings.”

CFO Smith said that “this $100 million collective progress payment [the company will be making at the end of the year] was $50 million lower than prior first-quarter guidance. These negotiated terms allow us to preserve cash during this difficult market. Further, this agreement allows us to minimize our idling costs during the extended delay period by remaining dockside.”

He continued that interest expense during the current fiscal second quarter should range from $15 million to $17 million, net of capitalized interest. “The lower interest expense from our prior guidance is due to the restructuring of our milestone payments to the DSME shipyard for our two ships under construction.

“Interest expense for the full fiscal 2016 is expected to be $65 million, and we still expect to pay cash interest for the year of $80 million for the year.” The interest guidance includes finance charges payable to DSME for the delay in milestone payments in the amounts of $9,000 per day for the Atwood Admiral currently, and starting in the Q3, $29,000 per day for the Atwood Archer.

Saltiel said that another cash-saving measure was the board of directors vote to reduce Atwood’s current dividend from 25 cents per share to 7.5 cents per share, “reflecting a desire to conserve cash during these challenging times. The board may decide to further reduce, or to suspend altogether the dividend at our next board meeting.”

The CEO declared that “we understand that with the challenges facing our industry, the main focus for many investors has shifted to financial liquidity and balance-sheet strength.

“We recognize that a strong balance sheet and adequate liquidity are imperatives for navigating this downturn, so maintaining both these qualities remains a top priority for our management team.”

© 2015 Prospect News.
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