Consider Atwood, because the world will be oil-hungry again, soon

Posted Apr 25th 2009 11:10AM by Joseph Lazzaro
Filed under: Stocks to Buy

Readers of this space know that one of the preferred plays is oil/oil services. And why not? Demand for the world's most important commodity has merely paused with the global recession, and it has not been displaced.

True, alternate energy sources will increase in terms of the percentage of total energy consumed in the decades ahead, but oil has such a dominate share it will remain a major energy source for a long time, which is why contract driller Atwood Oceanics (NYSE: ATW) worth a review.

In general, analysts see up to 80% contract cover for FY 2009, and 60 to 65% for FY 2010, which provides more than adequate business, moving forward.

Other positives: Atwood has eight active rigs, three rigs scheduled to be deployed through 2012, and another three rigs under construction, good for a $1.2 billion revenue backlog. The First Call FY 2009/FY 2010 EPS estimates for ATW are $3.64 to $4.42.

The risks? A decrease in day rates stemming from a prolonged global recession (which would elongate oil's modest-price period) would weigh on revenue, but a P/E of 7 easily tips the risk/reward scale in favor of a Buy.

Stock Analysis: Atwood Oceanics is a moderate-risk stock. Consider buying a 25% position in ATW now; then buy another 25% in three months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your ATW position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $8.00.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: ATW, Atwood Oceanics, oil services