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Friday, February 11, 2011

GTM …No Its Not A New Video Game.. It is Government Motors new acronym “Grand Theft Motors”

The current environment we are living in virtually nothing comes as a shock to me anymore, however, it appears that just like “Jello” there is always room for disgust. The latest item that I find unbelievably offensive is the news of GM and Chrysler paying out bonuses to salaried individuals. Please understand dear reader, I bear no grudge against the salaried people at either of the companies, but even with Grand Theft Motors going public they still owe all of us plenty on the bailout funds.

The latest repayment on 12/10/2010 of $2+ Billion received little media fanfare especially compared to the hoopla that surrounded the “going public again” stock offering.  Of course even with all the gimmicks, paybacks and stock offerings GM still owes you me and all the other US taxpayers $27,290,985.66 before we are off the hook.

I have written on these pages before about Grand Theft Motors and the fact that it is loser in terms of being a viable business and a poor investment. The stock debuted at $34 and rose to $38 or so before falling back, which I could deem normal but considering the amount of interest and calls for rocketing prices it shows much less confidence in GM than was portrayed in the Main Stream Media (MSM). When the stock offering was announced I wrote a piece called “GM : The Retread” and I still stand by what I wrote. Prior to the aforementioned article I penned a missives entitled, “GM : Government Motors, Government Mischief Or A New General Motors” and “Why Is No One Bothered” that detail issues regarding GM.

As you can see dear reader I am no stranger to being a critic of GM and the piece regarding people not seeming to be bothered is sort of related to the issue today. In the “Bothered” article I voiced my opinion that a company which was bailed out and is so indebted to the tax payer should not have any right or business donating to political parties or causes. I felt then and still do that it is both a conflict of interest with the people who bailed them out and that they should have remained focused on the task at hand, in other words fixing GM. I personally was outraged and I know some of you were to as I did receive supportive emails to that affect. Yet in the MSM there was barely a mention or even a criticism.

So as a result, it comes as no surprise that GM who owes their hides to John Q felt emboldened and is now up to new shenanigans. Hang on to your hat because you will need something to throw at the monitor when you read this.  Hot off the presses at Bloomberg comes the following headline “GM, Chrysler Workers’ Bonuses Said To Reach As Much As 50% of Pay”, no kidding. So both companies GM and Chrysler who owe us big time are going to pay themselves instead of paying the US Tax Payers.  As I said earlier I don’t begrudge the workers as they have no real influence in this decision, but really the management of both companies must have some real stones to do this. It is this kind of arrogance and hubris that cuts to the very core of the problem in the US both in business and politics.

How can the managements of these companies justify this action? There is the fear argument that if they do not employees will leave. Really, in Detroit and the auto industry with its high unemployment rate I am sure that the workers there are plenty happy to have a job, so I don’t buy that argument. Even though Ford is paying more since they were able to avoid bankruptcy does not mean that they will hire people fleeing from GM and Chrysler and with no openings people will stay put.

Taken in the context of the size of both companies the payouts being discussed are not huge, however, it is more the point that it is not GM or Chrysler’s money they are playing with at least not until they have fulfilled their obligation to all of us who made it even possible for them to back away from the proverbial cliff.

Moreover, these announcements come before negotiations this year with the United Auto Workers union (UAW) which will provide leverage for their bargaining positions; you know the UAW will utilize this to the fullest extent possible. Gary Chaison, a professor of industrial relations at Clark University in Worcester, Massachusetts, said in an interview yesterday. “If these kinds of bonuses are paid to salaried workers, then the union’s demands will increase, knowing management can’t claim an inability to pay.” This bonus situation only buttresses the notion that the unions are entitled to “share in the auto industries growing prosperity”. My concern is that all of this is too much too early and the both companies are taking actions as if the bounce back from extremely depressed levels will be permanent. I believe that it is a mistake for the auto industry to assume that happy days are her going forward. We may have seen the bottom of the abyss but by no means can one confidently say we cannot slide backwards, which would put the auto industry in a position of promising today what they will not be able to deliver tomorrow.

Additionally, it is not just the salaried employees that look to getting a piece of the pie but also the very same unions with their excessive demands which put the companies at a disadvantage to begin with have their hand out too. UAW President Bob King has said he aims to recover some of the $7,000 to $30,000 in concessions each worker gave up since 2005 to help the U.S. automakers survive. The union surrendered raises, bonuses and cost-of-living adjustments. The UAW also agreed to a two-tier wage system in which new hires earn about $14 an hour, half the amount paid to senior production workers. “All the sacrifices that our members made to turn these companies around were part of the process that’s really led to this amazing turnaround,” King said in an interview last month. “We want our membership to share in a very meaningful way in the upside of these companies.” This is where the whole leach process starts anew and heading down this path it will be less than 5 years before GM and or Chrysler are back feeding at the public trough.

As a side note there have been opinions expressed regarding Chrysler’s spending of big bucks with their Eminem Super Bowl advertisement. I would have to weigh in on the side that feels it was a gamble but I consider it different from the issue of using taxpayer largess to help you survive and then pay people bonuses. In my opinion the aim was to change the dialog regarding Chrysler and seeing as this Super Bowl was the most viewed TV show ever it seems like a pretty good use of advertising funds considering 169.9 million people tuned in. Interestingly enough there was no real criticism of GM running multiple commercials during that same Super Bowl, kind of ironic. I guess commercials in smaller doses don’t get as much attention so maybe Chrysler was correct in their choice where as GM probably spent more based on the number of commercials bt did not stand out. I would rather have GM and Chrysler spending money on targeted advertising that will showcase their products and bring customers who can buy their products in to the showrooms. Isn’t that what it is all about, getting people to buy their vehicles? The only way that we the tax payers can hope to get our money back is for these two dinosaurs to become self-sufficient and be able to really pay us back and I don’t mean with other TARP funds but real hard cash, scratch, greenbacks, samolians! Of course driving your expenses while in a tenuous recovery is not a bright idea, especially when those expenses are of an ongoing nature like wages.

So dear reader, are you outraged yet? Did you throw something at your monitor? That quote from the 1976 film “Network” comes to mind. “I want you to get up off of your chair and go to the window and yell out I am mad as hell and I am not going to take it anymore”.

Where is Obama who chastised the auto executives for flying corporate jets to see him? Where is Obama who was upset with executive pay and bonuses in the past? Where is Congress? Where the hell is the government in all of this? I see the “Car Czar” Mr., I use that term loosely, Rattner is to busy with his own problems and selling his lame book to comment. Where is the “Pay Czar”? All the tough talk during the 2008-2009 crisis was just that, hot air. It appears that the lunatics are left to run the asylum yet again, there appears to be little or on oversight regarding our funds at work. While it is true that as part of the bail out there were restrictions regarding pay and bonuses for top executives, but apparently every one else is exempted from those.

Where is the outrage? How can this be permissible? I know people were upset at the bank bonuses but there too nothing happened. The looting of OUR treasury will continue unabated unless we the taxpayers demand it stops. Unfortunately there doesn’t seem to be the will or the organization to take on this problem so the outrage will continue. So going forward save some room for “Jello”…er… I mean disgust!

Thursday, February 10, 2011

Drilling For Dollars - Atwood Oceanics

Many of you may never have heard about a midcap company called Atwood Oceanics (NYSE: ATW), as it is not as well known as Diamond Offshore (NYSE: DO) or Transocean (NYSE: RIG). Atwood engages in offshore drilling, exploration and development of oil and gas wells. The company also provides support, management and consulting services in this arena.  While Atwood is not as large as Transocean or Diamond offshore it still has about 700 employees and 10 rigs operating around the globe.

Like many of the companies in the offshore industry after the British Petroleum (NYSE: BP) fiasco in the Gulf Of Mexico (GOM) Atwood was sold off and has struggled to get back to the price levels of yesteryear. Atwood's only stake in the GOM is a submersible rig that goes by the name Richmond yet it still was unfairly tarred with the same brush as players that have multiple rigs in that space. Mr. Obama's moratorium on “Deep Water” drilling put a real pinch on Atwood because of the typical market shoot first ask questions later psychotic reactions.

The action is no different than the selloff in tech we will probably see today as a result of Cisco's (NASDAQ: CSCO) earnings call. As a tangent Cisco guided down due to competition not so much because of the market environment for their products. The reaction of players in today's casino stock exchange is to just sell everything “tech” whether it is in the same space or not. There is no thinking involved to see if the factors that affected Cisco would have any impact on others in the space like say database sellers like Oracle (NASDAQ: ORCL) or Data storage companies like EMC (NYSE: EMC), instead there is just the herd throwing the baby out with the bath water providing great entry points on some issues.

Back to Atwood, their exposure to the GOM is only through the Richmond and being shallow water submersible many investors overlooked two key facts. First, since it is in shallow water it is not affected by any form of deep water moratorium. Second, the Richmond is a submersible which means that it can have the ballast pumped out of the tanks that allow it to stay in place and it can then be towed anywhere in the world there is demand.  The demand is there as we have not seen consumer demand for energy drop but rather increase even in these economic times. Combined with a variety of reports coming from governments and industry sources that point to increased demand and lower supplies; rigs of all kinds will have work even if they are not wanted in the GOM as short sighted as that may be. To add fuel to the need fire (no pun intended) there is a report out of Wikileaks today showing that the Saudi reserves that are always bandied about as the plug factor for any short fall are overstated by as much as 40%. If you are interested you can keep up with oil reports including demand and supply figures by reading the International Energy Agency's (IEA) web site where they publish a monthly PDF file with lots of great information.

Atwood Oceanics nine other rigs are located around the world ranging from Africa, Australia to Asia and consist of both Jack Up type rigs and submersibles. At the moment Atwood has six new rigs in process to aid in their growth. One of Atwood's new rigs is scheduled to come online this year and it is a submersible.  Atwood is also building five more rigs, three of which are scheduled to come online in 2012 and two others scheduled for 2013. While each rig will add to Atwood's growth profile the most exciting rig comes on line in 2013 as it marks an expansion into a new drilling segment. In 2013 the Atwood Advantage is to be christened in to service. The Advantage is an ultra deep water dynamically positioned drill ship which marks Atwood's first foray in the big boys playground. So as you can see with demand strong and supplies are questionable so there will be plenty demand for not just Atwood's services but the other drillers too.  As Atwood rolls out new rigs this should continue to add to their bottom line given the current oil picture. Moreover, if as supply figures indicate a gap between production and demand the need for more drillers could become acute and not only stabilize day rates but also could bolster new ones. Atwood like other contract drillers know their cash flow as the contracts tend to be long in duration, however, the ability to introduce new rigs in the future when demand could be even higher bodes well for increasing earnings.

Atwood with its roughly $2.7 billion in market cap is a peanut compared to RIG ($33 Billion) or DO ($10 Billion) , but it is financially just as sound.  Atwood sports a current ratio of 3.23 and carries about $300 Million in debt, with interest coverage ratio of 67.82% ATW is not even close to being over leveraged.  The real kicker comes from Atwood's margins; their operating margins are 48% and profit margin is 38.39% which outpaces just about everyone else in the space (Diamond Offshore comes close with 41.5% and 28.75% respectively). This means that Atwood is very efficient in how they run their business and they get the maximum bang for each buck they bring in.

From a valuation perspective Atwood's PE on a trailing basis is 11.47 and their forward PE is projected at 10.57 times.  The five year average PE for the drillers is on the order of 23 times earnings so one could argue that the entire sector is undervalued at the moment since the vast majority of the players in this space have a PE under 15.  If you look at Atwood specifically their PE has ranged in the past 5 years from a low of 3.2 to a high of 21.3 which averages out to 12.3; at their forward PE or current PE assuming minimal growth ATW should be able to trade up to the average. Of course I believe they will trade much higher since they have a backlog of over $1 Billion and plenty of cash on hand.  Moreover, with new rigs coming on line they should be able to generate even better earnings going forward. Additionally the 5 year PEG Ratio is .71 indicating that there is plenty upside as a PEG of 2.0 indicates fully valued.

I have attached a chart below so that those of you that are into Tarot  card  or pig entrail reading like myself can see the price action in Atwood. The weekly chart shows Atwood has etched out a cup with handle base and has broken out to the upside on strong volume. The shares are trading above all the pertinent moving averages, ie… the 10 week and 50 week. Additionally, the 10 week MVA has formed a golden cross by cutting through the 50 week which usually portends higher prices.  I would not chase Atwood above $43 and if you miss it put it on your watch list and see the next time it comes back to test the 10 week moving average would likely be a great entry point.

Disclosure: Long Atwood Oceanics.