Atwood Oceanics' Downgrade and Dismal Backlog: Can It Survive?
Atwood’s EV-to-EBITDA multiple
As of March 25, 2016, Atwood Oceanics (ATW) was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 4.34x compared to its three-year average of 6.28x. In the past three years, Atwood’s multiple reached a high of 9.36x and a low of 2.69x.
Atwood’s current valuation multiple has risen from last month’s 4.07x. For the same period, EBITDA estimates have risen by only 0.71%. The rise in the price of oil since February’s lows has created some positive sentiment, which gave a push to valuations.
Why EV-to-EBITDA?
Offshore drilling (XLE) (OIH) companies are best valued and compared using the EV-to-EBITDA multiple. A company’s forward EV-to-EBITDA multiple shows what investors are willing to pay for the next four quarters of estimated EBITDA.
For the offshore drilling industry, we believe the EV-to-EBITDA multiple reflects the perceived riskiness of investing in offshore drilling companies as well as investors’ expectations for the industry.
Peer valuations
Atwood’s current valuation multiple of 4.34x is one of the lowest among its peers. The valuation multiples for Noble (NE) and Seadrill (SDRL) are 6.12x and 6.23x, respectively, as of March 25, 2016. Pacific Drilling (PACD) and Diamond Offshore Drilling (DO) have valuation multiples of 7.13x and 7.35x, respectively.
Rationale behind low valuation
Atwood Oceanics doesn’t have any debt repayment concerns, and its leverage is one of the lowest among its peers. Atwood’s low valuation multiple reflects its risk of a low backlog, which is the lowest among its peers. In addition, all of its contracts except one will roll off in 2017.
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