I bought Awilco Drilling in the beginning of 2013 at 90 NOK/share, and after peaking at 162 NOK/share almost three months ago the shares are back to where they started. I was fortunate enough to sell a part of my position near the top, and the big question is of course: is it time to start buying again? Unfortunately the answer is not an easy yes since intrinsic value has been dropping as well. Oil prices are lower, and as a result day rates are also declining.
A glimpse of what is happening with day rates was offered by Transocean last Wednesday when they announced that the Transocean Leader was awarded a four year contract with a day rate of $335,000. The rig was previously operating for $400,000/day for Statoil in Norway on a contract that started in 2012. Since day rates have increased since early 2012 I’m afraid that Awilco’s day rates will drop more than the 16% implied by the new Transocean contract. Awilco is operating under contracts that were made in 2013.
To analyze the impact of various possible future day rates I have created a small DCF model. The two items that have the biggest impact on the calculated intrinsic value are future day rates and the discount rate. With a day rate of $275,000 and a 12.5% discount rate we get today’s share price ($13.80) as fair value:
A $275,000 day rate is 30% below the current day rate. I think this is a bit pessimistic for Awilco since day rates in the UK remained at ~$250,000 even when oil dropped to $40/barrel in early 2009. With day rates at $300,000 the model spits out a value of $16/share while at a $325,000 (representing a 16% discount) fair value per share would be $18. I think using a $300,000 day rate is a reasonable base case. Unfortunately this means that Awilco is probably just slightly undervalued at ~$14/share. So even though the shares have dropped significantly the past months I wont be in a hurry to add to my position.
Author is long AWDR.OL