Awilco Drilling released a short press release today announcing that they have signed a letter of intent with Apache and Taqa to rent out the WilPhoenix rig for a 3 year period with options for another 2 years. The contract value is estimated to be approximately 424 million USD which implies a day rate of 387,000 dollar (current rate is $315,000/day). This is good news because the company has now locked-in high day rates for both their rigs for the foreseeable future. The WilHunter is on contract until 15 November 2015 and the WilPhoenix will now be on contract until the second half of 2017. With so much certainty about earnings I don’t think this stock deserves to trade at a 25% dividend yield.
Disclosure
Long Awilco Drilling
The main reason for the valuation discount seems to be concerns about the risk for a coming equity issue, as media recent media reports state Awilco Drilling has been looking at newbuild rigs lately. A new rig order and the div yield will go from 25% to 0% overnight. Still cheap on asset values after that, but I wouldn’t buy it with a dividend angle.
I’ve seen this concern voiced before and it certainly is a risk. So far managements track record wrt capital allocation is good though, so I hope they are smart enough to not use undervalued equity as a currency.
Hey all:
The rumors about Awilco building new rigs are just that, rumors.
Management has denied this, and I am inclined to believe them.
They have stated on MULTIPLE occasions that returning cash flow to shareholders is a top priority.
Additionally, what if they could get new rigs that were 100% financed, or close to it, without issuing equity? I don’t think that would be a good idea…but you never know. It appears day rates are going to be solid for the next 4 years.
If management DOES NOT build new rigs, or buy expensive used ones, and simply keep the company steady, they are going to make a LOT of money for the next several years.
As long as they don’t do anything stupid, the stock is drastically under priced.