I don’t typically do follow-up posts on companies I’ve written about before, figuring that all you readers out there are more interested in fresh ideas. However, Awilco Drilling continues to present such a compelling value proposition that it richly deserves another look.
I’m proud to say I was the first investing blogger to profile Awilco Drilling. That was back in May, when the stock traded around $14 and had not yet begun paying dividends. A lot has happened since.
- Dividends – True to its word, management has paid out substantially all free cash flow to shareholders – $1.00 per quarter thus far.
- Contract extensions – In May, the revenue backlog for WilHunter and WilPhoenix was $358 million. Now the revenue backlog is $800 million, with WilHunter fully-contracted until late 2015 and WilPhoenix fully-contracted until mid-2017.
- Improved liquidity and increasing market awareness – Until recently, Awilco’s trading volume was scant. Often fewer with 2,000 shares would change hands in the course of a trading day. Now, daily trading volume regularly exceeds 100,000, allowing many more investors the chance to accumulate a significant stake. This explosion in trading volume has been driven in part by some breathlessly optimistic Seekingalpha articles.
Awilco Drilling released its third quarter results yesterday, and the numbers could hardly have been better. EBITDA rose 19.9% over the previous quarter and net income rose 24.5% on the strength of higher contract rates and controlled expenses. Revenue efficiency was an amazing (and likely not sustainable) 98.9%. What that means is Awilco’s rigs were able to earn revenue on something like 182 of the 184 rig-days in the third quarter.
Notice the continued sequential improvement in Awilco’s results.
For the four trailing quarters, Awilco’s EBITDA was $151.4 million and net earnings were $113.7 million. Total debt has fallen by 12% since the end of 2012. The company has $43.6 million in cash on hand.
Despite a 50% run-up Awilco Drilling’s shares since May, the company still trades at remarkably low multiples of trailing results.
All of these ratios are mouth-watering, particularly for a firm with low financial leverage and extremely high earnings visibility multiple years out. And yet, these ratios are misleading. Awilco’s earnings are set to rise dramatically in 2014. For one, Awilco’s rigs were employed at significantly lower dayrates for much of the trailing twelve months than now, and will soon bring in even more. Wilhunter entered 2013 earning a dayrate of $315,000. Wilhunter now earns $360,000 and will see its dayrate rise to $385,000 mid-way through 2014. WilPhoenix entered 2013 earning $290,000. WilPhoenix earned a dayrate of $315,000 in the third quarter of 2013, and the rig’s daily revenue will soon rise significantly, hitting $387,500 in late 2014 and continuing for at least another three years. Awilco’s reduced debt load will also be a source of increased income as the company makes quarterly principal payments.
The higher dayrates and shrinking debt load should be good for Awilco’s dividend, which the company announced will rise 10% to $1.10 for the next quarter. The company reiterated its intent to pay out all free cash flow as dividends, while maintaining a healthy cash buffer and funding capital expenditures. 2014 could see further dividend increases as the company’s earnings rise. For now, investors will have to console themselves with Awilco’s 20.1% yield.
Awilco also outlined capital expenditure plans for the scheduled 2016 SPS (scheduled periodic surveys). Awilco will use the required inspection and repair period to upgrade each rig’s blowout preventer, or BOP. Awilco notes that BOP failure is the number one downtime risk for semi-submersible drillships, and that being fitted with brand new premium BOP systems will ensure that WilHunter and WilPhoenix can be hired by the supermajor operators. Critics of Awilco’s investment potential often bring up the risk of rig failure or blowout (suffering, I believe, from recency bias) so the news of upgraded BOP systems on the way should allay some of that concern.
Awilco’s detractors also claim the company’s rigs have only a limited lifespan remaining, but the company reiterated its rig life projections: 18 years for each rig. Some company staffer created this graphic for the quarterly report, which I find oddly hilarious.
Finally, the company used its quarterly presentation to express confidence in the North Sea rig market for 2014 and beyond, citing barriers to entry, sustained decommissioning and well abandonment work, and friendly UK government policy.
The market is slowly waking up to Awilco’s potential, but it’s a slow process. For now, investors still have a chance to buy into a high quality operation at a startlingly low valuation.