Atwood Oceanics (ATW) Outlook Lowered to Stable by Moody's; Deleveraging Seen Taking Longer

Moody's Investors Service (Moody's) revised Atwood Oceanics, Inc.s' (NYSE: ATW) rating outlook to stable from positive. At the same time Moody's affirmed Atwood's Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR), Ba3 senior unsecured note rating and SGL-3 Speculative Grade Liquidity Rating.

"The stable outlook reflects our view that Atwood's deleveraging from today's 3.2x debt/EBITDA level will take longer because of the expected weakness in offshore drilling markets through 2016, and the delayed cash flow contribution from its two uncontracted ultra-deepwater (UDW) drillships that are now under construction and will arrive six months later than previously anticipated, said Sajjad Alam, Moody's Assistant Vice President. "Faced with a one-two punch of oversupplied rig markets and sinking oil prices, it is unlikely that the company will achieve a level of cash flow that can meaningfully reduce leverage until late 2016."

Issuer: Atwood Oceanics, Inc.

Outlook Action:

....Changed to Stable from Positive

Affirmations:

....Corporate Family Rating, Affirmed Ba2

....Probability of Default Rating, Affirmed Ba2-PD

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 (LGD5)

....Senior Unsecured Shelf, Affirmed (P)Ba3

....Speculative Grade Liquidity Rating, Affirmed SGL-3

RATINGS RATIONALE

Atwood is actively looking to contract the new drillships for which it has $700 million in remaining shipyard payments due through mid-2016. We believe these new rigs as well as Atwood's five jackups and three deepwater semi-submersibles that will roll off contracts between now and late-2016, will re-sign at much lower dayrates than their current levels. The company may also experience delays in obtaining new contracts as a surge in rig supply will create a very competitive bidding environment globally through 2016.

We expect Atwood to have adequate liquidity through 2015 which is captured in the SGL-3 rating. Despite soft market conditions, the company should be able to fund all basic cash requirements from its substantial operating cash flow backed by existing customer contracts. The revolving credit facility will be used to fund a portion of the construction payments for the drillships. By pushing out the rig delivery dates, the company will be able to better match incoming cash flows with newbuild capex. Atwood increased the revolver commitment amount to $1.55 billion in April this year and extended the maturity to May 2018. The company had $80 million of balance sheet cash and $495 million available under the revolver at September 30, 2014. Atwood has substantial alternate liquidity with one of its high-specification jackups (Atwood Orca) and all four drillships not pledged to the revolver lenders.

The Ba2 CFR reflects Atwood's growing scale; diversified geographic exposure, rig fleet and customers; mostly high-quality assets and good contract coverage through 2016. The rating is also supported by the company's long operating track record and moderate leverage. The CFR is held back by Atwood's cash flow concentration in fewer rigs relative to larger and higher rated offshore drillers, limited prospects for meaningful leverage reduction through 2016 and uncontracted UDW drillships. The rating also considers the inherent volatility of the marine drilling market and the large global supply of newbuilds in the 2015-2016 timeframe that will pressure dayrates and utilization.

To consider an upgrade, we will look for Atwood Admiral and Atwood Archer to have long term contracts, continued robust utilization of the company's operating fleet, strong forward contract coverage and good liquidity, including less reliance on the revolving credit facility. Improved visibility around offshore rig supply, global oil prices and future dayrates will also be considered when considering a positive action.

Atwood's ratings could come under pressure if it is unable to sustain debt/EBITDA below 3.5x. Operational setbacks involving the larger UDW rigs, significant construction or re-contracting delays, and liquidity challenges would pose the greatest risks to ratings given Atwood's substantial capital requirements through 2016.

The principal methodology used in this rating was the Global Oilfield Services Rating Methodology published in December 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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