Tag Archives: AWDR.OL

Awilco Drilling reports Q3 results

Awilco Drilling reported an excellent third quarter with $46.3 million in EBITDA and a net profit of $36.6 million. Management is also keeping it’s word to pay out all excess cash flow, and is going to pay a $1.1 dividend next month (up from $1 the previous two quarters). Annualized this means that Awilco Drilling is still offering a yield above 20%. The dividend should be sustainable for at least the next couple of years since Awilco has signed contracts that extend into 2016/2017 with rates that are higher than today:

Awilco backlog as of today

More interesting is that the latest company presentation now also contains more information about the special periodic surveys (SPS) that will take place in 2016. The company estimates that this will result in 2 months downtime per rig and that it will cost $20 million per rig. Awilco Drilling will also upgrade the blowout preventers (BOPs) at the same time for a cool $45 million. With a estimated remaining fatigue life of 18 years for the rigs keeping the equipment up to date seems sensible. Check the milk illustration :D:

Awilco SPS ProjectAlso interesting is a new graph about the global midwater market, and the order book for new rigs worldwide. I bet they got a lot of questions from investors about this, because it always comes up when the company is discussed. The slide in question:

MW markets wordwide

Disclosure

Long Awilco Drilling

Earnings season updates (AWDR.OL, PVCS.L, CNRD, ASFI)

It’s earnings season again, and that’s always an interesting time for an investor since it’s the moment of truth: is your thesis playing out as expected, or is reality throwing a wrench in the wheels?

Awilco Drilling

Awilco reported results for the second quarter earlier today, and they are excellent. Revenue was 59.5 million thanks to slightly higher contract rates and a revenue efficiency of 97.3%. The company also announced a second quarterly dividend of 1 USD, giving the company a dividend yield of more than 20%. Other good news came earlier this week when the company announced that it signed a 3 year contract for the lease of WilPhoenix, increasing the value of the backlog with 424 million to 860 million. If the stock price stays at the current levels I’m probably going to increase my position slightly.

PV Crystalox Solar

Crystalox Solar also reported today, and the results for the first six months of 2013 seems to be alright. The business is in trouble, but the company does have a lot of cash and it anticipated that it should be roughly cashflow break-even in 2013 after restructuring. Cash from operations before changes in working capital is slightly positive while reported earnings are slightly negative. So that look good to me. The return of cash to shareholders is taking more time than I expected, but according to the company that should happen sometime later this year.

Conrad Industries

Conrad Industries reported yesterday and the results were simply excellent, and it appears that the company is on track to earn a record amount in 2013. The backlog is up 218% compared to previous year and the new construction site that was build on the land adjoining the Conrad Deepwater facility was taken in use this June. A slight negative is that it seems that the BP claim is being delayed, although that’s not a surprise given the fraud BP has to battle.

Asta Funding

ASFI reported results a week ago, and the most interesting development is the settlement with the Bank of Montreal on the non-recourse debt that backs the Seneca portfolio. Asta Funding has prepaid $15 million on the loan, and the next $15 million in of collections will also go to the bank. After this Asta Funding can recover the $15 million prepayment, and further collections will be split 70/30 between ASFI and the bank while the interest rate on the loan has also been lowered. Seems like there is a bit of value after all in the Seneca portfolio for Asta Funding, although it’s not going to be a lot.

Disclosure

Author is long AWDR.OL, PVCS.L, CNRD and ASFI

Awilco Drilling increases backlog

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

Bought Awilco Drilling

After thinking some more about the risks and rewards inherent in an investment in Awilco Drilling I have decided to buy a relative small position in the stock. There are a lot of risks, but at the same time I do think it’s an asymmetric bet. It’s highly likely that a very large part of my original investment will be returned in the next three years, and while the future is uncertain there is a wide range of possible favorable outcomes. Dayrates going down to $250K/day is probably still fine, dayrates staying at the current level is great and dayrates going up is even better.

Awilco Drilling also reported the results for the first quarter of 2013 yesterday and it’s good news all around. EBITDA was up compared to the last quarter of 2012, revenue efficiency was at 91.2% (pretty good for the winter season I’d guess) and most importantly the board approved a $1.0/share dividend. At current prices that represents a 25% annualized yield, and that’s more than what I would have expected given the tendency of companies to find reasons to spend and keep cash. Also positive is that Premier Oil exercised its option to extend the term of its drilling contract with AWDR, so rates have been locked in for a longer period in 2014.

Disclosure

Long Awilco Drilling

Awilco Drilling (AWDR.OL): cheap with a catalyst redux?

Awilco Drilling PLC is a recently formed company that owns two semi submersible drilling rigs. The rigs were bought from Transocean in the beginning of 2010 that, following a merger, was under obligation to reduce its exposure to UK waters. The two rigs, the WilPhoenix and the WilHunter, have been upgraded in 2011, and after a bit of a slow start in 2012 the company is now set to generate a significant amount of free cash flow that it intends to pay out to shareholders. The author of this write-up at the OTC Adventures blog sees a possible yield of more than 20%, and that sounded cheap enough that it got my attention. As usual some quick stats before diving deeper:

Last price (May 10, 2013): 82.75 NOK
Shares outstanding: 30,031,500
Market Cap: NOK 2.49B ($428.7M)
Free float: 51.27% ($219.8M)
P/B (mrq): 2.4x
P/E (ttm): 11.0x
EV/EBITDA (ttm): 7.35x

Backlog

Based on these metrics the company doesn’t look very cheap, but we can make a decent estimate of the future profitability based on the current contract backlog. The WilHunter is on contract until 15 November 2015 while the WilPhoenix is on contract until early May 2014. The day rates that Awilco Drilling will receive are therefore already locked in. From the latest company presentation:

Awilco Drilling backlog April 2013These rates are quite high thanks to tight supply in the UK drilling market, and if everything goes smoothly Awilco Drilling should generate a lot of cash. I have created an estimate for 2013 based on the above backlog assuming that other items such as operating expenses and depreciation stay at levels consistent with previous year. Note that the interest expense is slowly going down because the company is paying down approximately $16.5 million in debt this year.

Awilco Drilling estimated 2013 results

Awilco Drilling pays almost no taxes because the rigs are owned by subsidiaries located in sunny Malta. The effective tax rate might even go down in the future because the UK corporate tax rate is being lowered the next few years from 28% to 20%, and the taxes that they do pay are mostly UK taxes. Last year the company paid just 6.4%.

The possible income of roughly $116 million in 2013 would translate to a significant amount of free cash flow. Last year capex spending was $5 million while depreciation was $17.5 million. This means that free cash flow could approximately be $129 million while free cash flow to equity (after paying down $16.5 million in debt) could be ~$112.5 million. This represents a yield of roughly 25%!

Do I expect that they company will achieve this? No, because this is more-or-less a best case scenario. On average we should expect some bad stuff and operating expenses are probably going up compared to 2012. But with a possible 25% yield you have room for some unfavorable events and still arrive at a >20% FCFE yield. But a significantly worse results is certainly also possible. The company owns just two rigs, and serious problems at one of them could have a very big impact. There is a lot of idiosyncratic risk.

Dividend prospects

The second big positive is that Awilco Drilling is planning to return basically all free cash flow to investors, after maintaining a $35 million cash buffer. This intention is communicated crystal clear in  the financial reports and the various presentations. See for example the latest presentation:

Awilco Drilling divided prospectsGiven how much cash flow the company could generate the next few years it isn’t hard to see how the initiation of a big dividend could be a catalyst for the shares to reprice higher. Since the company already had $17 million on the balance sheet at the end of 2012 it should be right on track to start quarterly dividend payments in the second quarter of 2013.

Valuation

So we will get probably get a high yield with limited risk the next couple of years because high rates have been locked in, but is this enough reason to pay more than two times book value for a company that is active in a commodity industry? The question is of course how well book value reflects the economic value of the two rigs build in ’82 and ’83. The rigs were sold by Transocean for $195 million in January 2010 in what was arguably not the best economic climate. Transocean booked a loss of $15 million on the transaction while it already had recognized a $279 million impairment loss on the two rigs in 2009 when oil went below $40/barrel. In other words: a couple of years ago the book value of the two vessels – before being upgraded in 2011 for almost $100 million – was around $500 million. Add that Transocean was forced to sell because of antitrust concerns and it seems plausible that Awilco Drilling got a good deal.

This doesn’t bring us really closer to a valuation, and fact is that a narrow value estimate is going to be a though task because it depends on volatile day rates multiple years in the future. The UK market is almost sold out until 2015, but what will happen with the rates after that? It’s highly uncertain, but even if rates would plummet you would have some downside protection since you will get a large part of your investment back the next couple of years while the company is simultaneously deleveraging. If rates stay around the current level, or go up, an investment in Awilco Drilling should work out very well as long there is no negative tail event (think Deepwater Horizon, Piper Alpha etc).

While you would get a good return in that scenario I think investors should also demand a high expected return. You get the idiosyncratic tailrisk that everybody thinks about when see a burning oil platform on the news with Awilco Drilling, and you can diversify that away, but there is also a lot of market risk, and I think that’s a lot bigger and more important. The profitability of oil drilling is strongly correlated with oil prices and thus the strength of the economy, and there is a lot of operating leverage involved in owning a drilling rig. Throw a bit of financial leverage in the mix and it should be clear that equity investors should demand a healthy return! The average value investor isn’t a big fan of CAPM, and for a good reasons, but seeing that Transocean trades with a beta slightly above 2 should say something about the market risk.

I’ve played around with a few valuation approaches and what makes most sense to me is to assume that earnings will be high the next three years, and that the risk in achieving these earnings is moderate so that the expected cash flows for the next three years can be discounted at a reasonable average rate such as 10%. Current day rates are probably the best starting point for a prediction of future day rates, but since this is a lot riskier a significantly higher discount rate is appropriate. If I would use a 10% discount rate for the first three years and a 20% discount rate for the years after that I get an approximate value of ~$600 million dollar and more than half of that NPV comes from the first three years. Lower discount rates can obviously increase the value a lot, but I doubt how appropriate that is given the amount of risk involved after the first few years.

Insiders

Awilco Drilling PLC is owned for 48.73% by Awilhelmsen AS, a privately owned investment company. Sigurd E. Thorvildsen is the Group CEO and also Chairman of Awilco Drilling PLC. The COO of Awilhelmsen AS is also a non-executive director. So while the CEO of Awilco Drilling PLC doesn’t have a stake in the company (besides a few options) shareholders are well represented on the board. I prefer to see a CEO that owns a significant stake in the company, but this is also a decent structure.

Conclusion

The near term cash flows of Alwilco Drilling and the intention of the company to return that money to shareholders through dividends sound very attractive, and especially in today’s yield starved world I can imagine that the initiation of a healthy dividend can act as a catalyst to propel the stock higher. But I’m not willing to buying stocks hoping on a greater fool to sell them to in the future, I have to be comfortable with the underlying intrinsic value. And while I do think that Awilco Drilling is cheap, I’m not that sure that it is a huge bargain. It’s a very risky asset and it should deliver a relative high yield as a compensation for those risks. I haven’t yet completely made up my mind, but at the moment I’m inclined to pass on this stock. What do you think? How much is it worth?

Disclosure

No position in Awilco Drilling, but thinking about it…