If offshore drilling industry conditions would have been robust, Atwood Oceanics (NYSE: ATW) would have been among my favourite stock picks considering the company’s high-specification fleet with an average age of just 4.5 years. However, in challenging times for the industry, a good company might not be a good investment and this article discusses the reasons to remain bearish on Atwood Oceanics even after the stock has declined by 80% in the last one year.

It is important to note that Atwood Oceanics reported revenue of $307 million for 1Q16 and the company still has an order backlog of $746 million for the remainder of 2016. It therefore seems strange that the stock has been on a continued downtrend even with strong revenue and cash flow visibility for 2016.

The reasons for the downtrend are as follows –

For Atwood Oceanics, the ultra-deepwater segment is the biggest revenue driver and the company has four operating rigs in this segment with additional two rigs to be delivered in September 2017 and June 2018. The key concern here is that one UDW rig is going off-contract in May 2016 and another UDW rig is going off contract in November 2016. If these rigs remain un-contracted due to challenging market conditions, the company’s revenue visibility for 2017 will slump.

In The deep-water segment, Atwood Oceanics has two rigs and these rigs are going off-contract in March 2016 and September 2016 respectively. Again, oil prices are sustaining at low levels and new contracts will be a big challenge.

In the jack-ups segment, Atwood Oceanics has five rigs with two rigs idle currently. The remaining three rigs are going off-contract in June, September and October 2016 respectively.

A reflection of these points comes in the company’s order backlog provided in the chart below. (Fiscal 2016 is period September 2015 to September 2016).

It is clear that the company’s order backlog will slump in fiscal 2017 and the markets are discounting this slump. Even if the company’s rigs are contracted at some point of time, the day rates will be significantly lower and EBITDA margin compression is likely. Therefore, Atwood Oceanics reached the EBITDA cliff in fiscal 2015 and I expect weaker EBITDA for the next 12-24 months.