Why S&P Downgraded Atwood Oceanics to B+

Atwood Oceanics downgraded

Standard & Poor’s downgraded Atwood Oceanics (ATW) to B+ from BB. It maintained its “negative” outlook on the company. A rating of B+ means “highly speculative.” The credit rating came down two notches.

Credit ratings for peers

A B+ rating from Standard & Poor’s is equivalent to a Moody’s rating of B1. Moody rates other offshore drillers (OIH) too. A similar B1 rating goes to ATW’s peers Noble (NE), Rowan Companies (RDC), and Ensco (ESV). Ocean Rig (ORIG) and Pacific Drilling (PACD) have lower credit ratings of Caa2, which means “substantial risks.”

Why S&P downgraded ATW

Atwood’s credit fell since S&P expects Atwood’s credit measures to deteriorate significantly in 2017 and 2018 due to depressed industry conditions.

S&P also expects the oversupply of new rigs and low commodity prices to increase competition and, consequently, re-contracting risk over the next two years. This change would result in downward pressure on day rates and utilization levels. With lower utilization and reduced day rates, S&P also expects Atwood’s cash to deteriorate significantly over the next two years.

Based on current contracts, Atwood has only 20% of its available days contracted in 2017 and only 10% in 2018. Most of the rigs coming off their contracts are likely to remain underutilized or idle due to the depressed market.

Positives for the company include a younger fleet than most of its peers and a strong customer base—which includes Chevron, Royal Dutch Shell, BHP, and Noble Energy. Plus, it has a diversified geographic presence and one of the highest operating margins among its peers.

You can learn more about Atwood Oceanics’ fundamentals in our recent report Atwood Oceanics’ Downgrade and Dismal Backlog: Can It Survive?