Atwood Oceanics Inc. engages in the offshore drilling of oil and gas wells worldwide. It operates eight offshore mobile drilling units located in six regions of the world, including offshore Southeast Asia, offshore Africa, offshore India, offshore Australia, the Black Sea, and the United States Gulf of Mexico. Although it has had a big run recently, here’s why I think Atwood will continue to perform strongly in the coming months.
Atwood is a leveraged play on the price of oil. Last week’s intra-day high of $117 a barrel blew past the original estimates of major investment banks. Commodities guru Jim Rogers recently predicted that oil will soon hit $200. Amid record high oil prices and dwindling supplies on land, the Shells, Exxons and BPs of the world are having to venture into ever harsher and more remote environments offshore to replenish their oil reserves. That puts offshore oil drillers like Atwood Oceanics in the catbird seat.
As a result, day rates for Atwood’s rigs are exploding. For example, one of Atwood’s rigs is currently working for BHP Billiton at $170,000 per day. In May, that figure jumps to $360,000 per day for a one-well Eni job. Next, it’s $405,000 per day for two years with Woodside Petroleum, and finally, it’ll be around $450,000 for Chevron into early 2011. And with only 37% of the company’s rigs booked up for 2009, and some rigs in the industry already fetching rates of up to $600,000 per day, the opportunity for ever higher day rates is enormous. No wonder Atwood’s earnings grew at a breakneck 128% last quarter.
Atwood also is in a strong sector and the stock has just broken out from its trading range. That means Atwood should continue to move up despite its recent substantial gains. The company is also relatively small, and has zero debt, making it an attractive takeover candidate for larger competitors like Transocean.
So buy Atwood Oceanics Inc. (ATW) at market today and place your stop at $82. Aggressive investors may want to buy the September $120 call options, ATWID.X. The biggest risk I see in the stock during the short term is that it is technically overbought. At the same time, with global fund managers sitting on record levels of cash, stocks like Atwood will continue to skyrocket on the back of improving market sentiment. And if you’ve ever been curious about life on an offshore rig, this video offers you a good feel.
PORTFOLIO UPDATE
You had a big week with Potash rising 14.68% and you doubled your money in the options in eight trading days — your fastest gains so far in 2008. With a target price of at least $225, hold on to both the stock and the remaining options for now.
To make room for Atwood, sell your defensive position holdings in the CurrencyShares Swiss Franc Trust (FXF) at a slight loss. As usual, sell the corresponding options to exit that position completely. We’ll try to recoup the loss in the options with our other picks.
P.S. Join my Eagle Publishing investment colleague Mark Skousen and me for FREEDOMFEST 2008, "The Trade Show for Liberty," on July 10-12, 2008, Bally’s/Paris Resort. FreedomFest will feature more than 88 speakers, 100 exhibitors, and 1,000 attendees. Guests will include John Mackey, CEO of Whole Foods Market, Congressman Ron Paul, a 2008 Republican candidate for president, Steve Moore, of The Wall Street Journal editorial board, David Boaz, vice president of Cato Institute, Robert Poole, Jr., of Reason Foundation, Jeremy Siegel, "The Wizard of Wharton," and Rick Rule, one of the country’s top money managers. Also hear Frank Holmes, Doug Casey, Larry Abraham, Ron Holland, Frank Trotter, Bert Dohmen, Keith Fitz-Gerald, Peter Zipper, John Mauldin, and many more.
