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Texas-based offshore drilling contractor Atwood Oceanics Inc. (ATW) was awarded a drilling services contract by Shell Offshore Inc. for the dynamically positioned, ultra-deepwater semisubmersible rig – Atwood Condor.  

The rig has been contracted at a dayrate of $555,000 for a period of 39 months. This contract adds approximately $502 million in revenue backlog. Atwood Condor will be deployed in the U.S. Gulf of Mexico. The rig is currently contracted by Hess Corporation (HES - Analyst Report). Shell Offshore’s contract for the rig would start in Jun 2014 and would extend till Nov 2016.

The contract signifies Atwood Oceanics’ emphasis on expanding its offshore exploration programs. We believe the company’s strategy of optimizing its global oil and natural gas drilling assets will generate favorable returns.

Recently, Atwood Oceanics was awarded a 2-year contract for the semisubmersible drilling unit Atwood Eagle. The rig was contracted at a dayrate of $460,000.

Founded in 1968, Atwood Oceanics is a global offshore drilling contractor focusing on the drilling and completion of exploratory and developmental oil and gas wells. The company currently owns 13 mobile offshore drilling units and is constructing three ultra-deepwater drillships.

We see Atwood Oceanics’ leverage to the global drilling market rather than the domestic market as its biggest advantage over most of its peers. The international drilling outlook has been strong versus the muted fundamentals in the U.S. In our view, the company presents investors growth opportunity from any global deepwater drilling recovery.

However, certain factors remain that are likely to keep near-to-medium-term earnings under pressure. The termination of any contract for tender-assist rigs is bound to affect the earnings and cash flow to the company. Also, downtime in any of the company’s rigs currently under contract will be an additional blow to the bottom line.

Atwood Oceanics currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next 1 to 3 months.

Meanwhile, investors can consider other energy firms like Newpark Resources Inc. (NR - Snapshot Report) and Abraxas Petroleum Corporation (AXAS - Snapshot Report) as attractive investments. Both these firms sport a Zacks Rank #1 (Strong Buy).

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