Bargain-hunting Pollyannas are expressing unwarranted optimism over several oil drillers, viewing their beaten-down shares as attractive value plays amid higher crude prices.
But it looks like a sucker's bet, and investors should avoid these dangerous equities.
A case in point is Atwood Oceanics (ATW , which is scheduled to report third-quarter earnings on Friday. With a market capitalization of just $462.67 million, this Houston-based offshore drilling contractor is a small-capitalization player in an industry dominated by behemoths such as Schlumberger and Transocean.
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Atwood Oceanics owns a fleet of 11 mobile offshore drilling units, as well as two ultra-deepwater drill ships under construction.
Shares jumped more than 1% on Monday, though they are down again on Tuesday, as the price of West Texas Intermediate, the U.S. benchmark, gained 0.38% and Brent North Sea crude, on which international oils are priced, gained 0.56%. Atwood Oceanics shares have dropped nearly 30% this year, which the energy bulls have interpreted as a buy signal.
Investors shouldn't touch the stock, or they could get burned. Growth opportunities abound in resurgent sectors such as aerospace/defense, banking and technology, so it makes no sense to put portfolios at needless risk in a troubled niche.
Let's start with projected earnings.
The average analyst consensus is for Atwood Oceanics to report third-quarter earnings of 60 cents a share, compared with $2.32 a share a year earlier. Fourth-quarter earnings are estimated at 15 cents a share, compared with $1.32 a share a year earlier.
Full-year earnings are pegged at $4.66 a share, compared with $7.70 a share a year earlier. For full-year 2017, analysts expect a 69-cent-a-share loss.
That is hardly an earnings growth curve. Over the next five years, earnings are expected to fall 62.20%, compared with an 11% gain for the industry.
Estimated sales fare no better. The company's sales growth year-over-year is estimated to fall 46.40% for the third quarter.
Atwood Oceanics is saddled with total debt of $1.38 billion, for a total debt-equity ratio of 42.75.
That is somewhat better than Schlumberger (50.05) and Transocean (54.22) but still unhealthy and unsustainable, considering projected earnings and sales growth. Companies such as Atwood Oceanics are simply buying time until oil prices execute a lasting recovery, but that long-awaited turning point increasingly appears to be a mirage.
At the close on Monday, crude hovered at about $45 a barrel, considerably higher than the lows of the mid-$20s hit in February but still beneath the $50 threshold that is considered break-even for energy companies. Oil prices have been unable this year to pierce the $50 ceiling for any length of time.
It is the sort of frustrating financial scenario that has been driving scores of energy companies into bankruptcy. Since the price of crude oil started falling in mid-2014, more than 100 North American energy companies have filed for bankruptcy, with at least another 100 expected to follow.
Full recovery for the oil and gas sector remains elusive and could take many months. As energy prices and the broader equity markets struggle for the rest of the year and into 2017, there are far better places to invest than in oil rig operators that face existential threats.
It's not just Atwood Oceanics. A blistering financial storm is about to clobber our shores. And when it hits, fundamentally weak companies and their investors will be swept out to sea. You need to put your portfolio on solid ground. I'll show you how to protect your wealth and prosper when you click here.