Awilco Drilling Plc owns two semi-submersible drill ships that operate in the North Sea. Awilco acquired these ships from Transocean in 2009 and spent the following years completing upgrades on the ships and signing contracts with oil drillers. Now that its fleet is fully utilized, Awilco has announced it will begin paying out all free cash flow to investors. At the current share price, this could represent a yield of over 20% and may lead to substantial appreciation.
The first of Awilco’s rigs is the WilHunter, pictured below.
The WilHunter was built in 1983 and upgraded in 1999 and 2011. The ship is capable of operating in water depths of 1,500 feet and can drill 25,000 feet. WilHunter is contracted to Hess until November 2015, with options to extend the contract another 275 days. The dayrate is $360,000, increasing to $385,000 in May 2014.
Awilco’s second rig is the WilPhoenix.
The WilPhoenix was built in 1982 and upgraded in 2011. It can operate in water depths 1,200 feet and drill 25,000 feet. WilPhoenix is contracted to Premier Oil until May 2014, with options to extend the contract another 180 days. The day rate is $315,000, increasing to $351,000 in October 2013, then returning to $315,000 in March 2014.
Awilco is highly profitable at current dayrates, but tight rig supply and persistently high oil prices may bring even higher rates in years to come. When WilPhoenix’s contract ends in mid or late 2014, it will be one of the few rigs available. In its April 2013 presentation to shareholders, Awilco included a chart illustrating the supply situation.
The company also provided a helpful chart showing historical dayrates and supply trends.
If these images are difficult to read, simply click for the full-sized versions.
Awilco’s performance in the fourth quarter of 2012 was its best yet, based on higher dayrates and full utilization of its fleet. For the quarter, the company earned $0.76 per share on revenue of $52.8 million and produced $32.6 million of EBITDA. This EBITDA figure included $3.56 million in provisions for doubtful debt, which will presumably not be a repeating expense. EBITDA excluding the charge was $36.2 million.
With its rigs fully contracted for the next year, its not stretch to assume Awilco can produce earnings of at least $3.04 per share and EBITDA of at least $144.8 million. I say “at least” because these figures exclude the increased dayrate WilPhoenix will earn beginning in October 2013. These projected earnings also exclude benefits from debt reduction and the absence of future doubtful debt charges. Earnings in future years could be even higher if rig supply remains constrained or if oil prices rise.
In the face of these projections, Awilco’s valuation is extremely low. (Again I’ll emphasize these projections are not pie in the sky figures based on breathlessly optimistic assumptions, they are based on Awilco’s actual signed contracts with oil majors.) Awilco has 30,031,500 shares outstanding. The recent trade price of $14.10 yields a market capitalization of $423.4 million. Net debt is $97.7 million. P/E based on conservatively estimated $3.04 per share earnings is 4.6 and EV/EBITDA based on EBITDA of $144.8 is 3.6.
Using these projections and assuming free cash flow approximates net income, Awilco’s annual dividend will be $3.04 per share for a yield of 21.6% on the current share price. Now, the dividend may not reach these heights immediately. Awilco has said it will retain a $35 million cash buffer for operational and capex needs, and it may take time to build this reserve. The company also indicated it will not allow the dividend policy to keep it from pursuing worthy growth opportunities, but said it will continue to pay a healthy dividend even if it engages in an acquisition or another initiative.
Cheap stocks are great, but cheap stocks with a catalyst are better. In a yield-starved world, a 20%+ yielder that is not an MREIT or a wasting asset like a royalty trust will turn some heads. Awilco will pay its first dividend in the first half of 2013. At that time, the company will no longer fly under the radar.
Awilco Drilling does bear substantial risks. Chief among them is the company’s concentration. Because it has only two drill ships, the company is vulnerable to a host of potential issues like operational problems, damage or disputes with the contracting oil companies. With only two revenue streams, a disruption in either would affect earnings severely. Awilco is also exposed to mid-water dayrates, over which it has absolutely no control. Rates have been very strong, but high rates may eventually attract competitors. Alternatively, oil prices could crash and dayrates could tank.
Another issue Awilco faces is the age of its ships. Though they were upgraded in 2011, each ship is three decades old and won’t last forever. In its 2011 annual report, Awilco lists the expected life of each ship as 20 years. As they age, these ships may command lower dayrates or require expensive upgrades.
Awilco’s illiquidity should also be considered. Though it has a market capitalization of $423.4 million, only just over $50 million worth of shares are available for trading. The remainder are held by a variety of banks and pension funds. A related company, Awilco Drilling AS, holds 48.73% of Awilco Drilling. Awilco’s US ADR is traded on the grey market, with a few thousand shares trading hands on a typical day. The company’s primary listing is the Oslo Exchange, where it is slightly more liquid.
I have a position in Awilco Drilling.
Neat find. What is your thinking regarding taxation and operating utilization? Also, I assume you bought this on Oslo? There’s absolutely 0 liquidity on the OTC.
Effective tax rate will probably increase, but I don’t see that getting in the way of achieving $3+ per share in earnings. I look at it this way:
$145m EBITDA
-$16m Depreciation
= $129m Operating Income
-$10m Interest
= $119 Pre-Tax Income
– UK Corporate Taxes @ 23%, $27.4m
= $91.6 Net Income
or $3.02 per share.
UK corporate tax is 23% beginning April 1, 2013, down from 24% in 2012 and 26% in 2011.
Operating utilization has been very strong. The company has guided for this to decrease slightly, but I think revenue efficiency will remain in the mid-90%s and EBITDA margin will remain in the high 60%s. Which is crazy high, if you think about it.
I actually did buy my shares OTC. It’s a grey market, so bids and asks aren’t available. But there is a surprising amount of liquidity, at least right around $14 where I bought my shares.
Their assets aren’t subject to income taxes…they are subject to UK tonnage taxes for offshore assets.
I can’t find out how many shares the ADR represents. The last SEC filing seems to be for CNOOC shares from its acquisition of Awilco Offshore.
I’m assuming it’s 6, but that does mean that the ADR is trading ~1.36% above the Oslo Stock Exchange price.
The ADRs are 1 for 1. The company does not file with the SEC, but many financial reports and presentations available on its website for shareholders.
Looks like the ADR does trade at a slight premium, but I am OK with that. I’ll pay a small premium on something I think should be 100% higher.
My mistake. I was confusing Awilco LNG’s stock price with Awilco Drilling’s.
You mention that the company is not a “wasting asset” like a royalty trust. However, you also point out that the main assets of the company only have an expected life of 20 years. If the company pays out all of their earnings as dividends, without retaining any earnings to buy new ships that will replace the current ships (once their useful life has been completed), then won’t the company meet the definition of a “wasting asset”
The point about eventually exhausting its assets and becoming worthless would be valid if the company planned to pay out all cash flow as dividends. However, the company only plans to pay out all free cash flow. Free cash flow is generally defined as operating cash flow less capital expenditure needed to maintain the business’s earning power. Awilco will certainly retain the funds needed to renew its assets.
Hey all:
Yet another compelling writeup here! Good work!
There are certainly wasting assets, but if they have a 20 year life left, do you really have to be that worried about it?
Awilco could pay out close to 100% of free cash flow for 2-3 years. Then they could cut back to maybe 80%, which should still be significant. After a couple years of strongly demonstrated cash flow, they could get debt financing on more advantageous terms.
If the company can do the following, this is one of the most compelling situations I’ve seen in a long time.
A). Avoid disaster
B). Keep their assets up & running & properly maintained
C). Not do anything stupid
D). Keep current customers satisfied
None of the above is rocket surgery. The huge dividend will remove a lot of risk very quickly.
A good strategy might be to hold for 18 months, collect some juicy dividends and then sell when the “retail” trade comes flooding in chasing the dividend and drives the price up 75%.
I am no expert in oil drilling or shipping, but the overall economics strike me as similar in both industries. With that perspective, you might find “The Shipping Man” by McCleery to be an interesting and relevant read. The novel is about a hedge fund manager who purchased an old ship that appeared to be priced at 1x EV/EBITDA – and explained all the ways that life can get really complicated. FWIW, Mohnish Pabrai recently recommended the book.
I appreciate all of your hard work in maintaining the blog. It is one of my favorites.
Cheers,
Tom L
Thanks for the kind words and the book recommendation! I read the Amazon reviews and I am sold on it.
Just don’t expect the writing to wow you, I think Whopper described it has meh and I completely agree. However if you want a good laugh about the portrayal of a NY hedge fund manager, it will certainly deliver.
Great blog as always.
-Paul
I agree with Paul. The dialogue is kind of forced and unrealistic, but I think it will give you some food for thought with regards to Awilco. I couldn’t put the book down because the topic was so interesting.
Best,
Tom L
Thanks for the input, both of you. I’ll temper my expectations for sparkling dialog and focus on the story!
very interesting idea, but what exactly is their definition of free cash flow? I can’t find it in any of their presentations and/or reports.
They stated that they want to pay down debt as well ($16 mio in 2013) and if they include these pay downs in their definition of free cash flow it will substantially lower the dividend pay out.
But the again, if you dare to call yourself a ‘mean, lean dividend machine’ in one of your presentations, you’re setting high expectations.
Thank you, again, for a great idea.
Sjoerd
where did they say they are going to pay a dividend? or is that your assumption?
The company has expressed its intentions in several press releases and investor presentations. All of these can be found at the company’s investors relations page. http://www.awilcodrilling.com/investor-relations
Why do you model the tax rate at 23% when historically they’ve paid close to 10%? If I recall correctly, a lot of these drill rigs are domociled in very tax advantageous locales resulting in low tax rates. IF the tax rate were 10% rather than 23%, that could bump up the dividend rate by 2-3%.
Simply for the sake of conservatism. You are right about the historical tax rates and the strategies the company uses to achieve that. (Ships owned by subsidiary in Malta, etc.) But I wanted to be sure the yield would be attractive even if the company somehow ends up paying UK tax rates.
I noticed this too. They’ve paid under 10% for as far back as I looked. But it’s good to be conservative – I used 23% when I ran my numbers as well. I recall arriving at slightly higher depreciation and interest – but agree with the general assessment.
Great writeup and great find! I’m long now.
Just reported. Declared a $1.00 USD dividend for the second quarter. Above what I would have thought. Very positive.
Thanks for your insights. And yes, the quarter was significantly better than I expected. I will have post about it this evening.
Today’s earnings release looks good, and confirmed dividend points to a solid yield. Digging further….
Q1 Report – Highlights
Awilco Drilling PLC reported contract revenue of USD 53.4 million (USD 52.8 million in
Q4 2012), EBITDA of USD 33.9 million (USD 32.6 million in Q4 2012) and net profit of
USD 24.7 million (USD 22.9 million in Q4 2012).
Revenue efficiency was 91.2% during the quarter (94.3% in Q4 2012)
Contract backlog at the end of Q1 was USD 466 million (USD 297 million Q4 2012)
The board approved a dividend distribution payable in Q2 of USD 1.0 per share
Hi,
Thanks for the writing. What is the ticker on IB?
I’ve had no luck allowing IB to let me trade AWLCF. They keep claiming it is not DTC eligible, which I know is not true. And, they don’t provide access to the Oslo exchange. I used an old TD Ameritrade account to buy my shares and had no trouble.
Haven’t checked the data but it seems like the rigs aren’t that old. In fact, with the recent updates, they are among the newest/best? available:
Year built
Transocean:
J.W.McLean – 1974/91/96
Sedco 712 – 1983
GSF Arctic III – ??
Sedco 704 – 1974
Sedco 714 – 1983/97
Transocean John Shawon – 1982
Sedco 711 – 1982
Transocean Prospecton – 1983/92
Paul B. Loyd Jr – 1990
Diamond Offshore:
Ocean Nomad – 1975
Ocean Princesson – 1975
Ocean Guardianon – 1985
Ocean Patrioten – 1983 (new entry in this UK sector may 2014)
Dolphin Drilling:
Byford Dolphin – 1974
Awilco drilling:
Wilhunter – 1983/2011
Wilphoenix – 1982/2011
Stena Drilling:
Stena Spey – 1983
Noble Drilling:
Noble ton van langeveld – 1979/2000
Seadrill:
West Phoenix – 2008
Ocean Rig:
Eirik Raude – 2002
Odfjell Drilling:
Deepsea Aberdeen – The semisubmersible will be delivered from the yard in May 2014 and will subsequently start drilling operations under a 7-year contract with BP in UK.
http://forum.hegnar.no/post.asp?id=18644604
I was not previously familiar with AWLCF. Interesting insight, thanks for your post.
A reader attempted to post this comment but had trouble with the verification system. It was an intelligent comment, so I am posting it for him:
I found out about AWLCF recently and have invested in it. I have learned a lot from the post and information here and in the “related” blogs and forums that are referenced. My research has turned up important and interesting information that I would like to share with the community.
The 2 rigs owned by AWLCF are drillships. Modern drillships, built in the last decade or more, can drill in very deep water or 8-10,000 feet. The drillships owned by AWLCF are from an earlier generation. The WilPhoenix has a max water depth of 1,200 feet and the WilHunter a max depth of 1,500 feet.
Now in general of course deeper is better and more profitable and no new drillships are being built for the depths of Awilco’s fleet. However this extra capability is not necessary in the North Sea as all, or most, of the targets are within the range of Awilco’s rigs. No one is really interested in using one of the modern deepwater ships in the North Sea area since those ships command rates that are about 50% higher than the rates paid for the older, less capable drillships like WilPhoenix and WilHunter, and their extra capabilities are unnecessary in the North Sea.
So there is a sort of sweet spot in which Awilco’s rigs sit. They are perfect for the North Sea, no new ones are being built and demand is very high. But there is an obvious barrier to the entry of the modern, more capable rigs into the North Sea area. There is also the barrier that a significant amount of work and investment is necessary just to meet the general UK safety requirements.
Also if you look at the work that was done on the rigs in 2011 (on the website under Rig Fleet / Projects) you can see that they put in new offices and living quarters. Those are (IMO) the types of upgrades you make if you plan on using the rigs for a long time.
All this adds to the bullish case for the company, and somewhat mitigates the concerns about rig life expressed by some. It looks like they will keep these working as long as they can since they are a good fit for the North Sea area and there are no ready substitutes.
I would like to add that even if there would be an influx of new rigs in the next 10+ years it doesn’t mean that older rigs are going to be useless.
WilHunter is already just abonding wells for Hess and besides the fact that this seems to be a relativly hazard-fee job ( that might put these worst-case scenarios into perspective) there are thousands of wells that need to be abonded in the next decades.
So I am pretty certain that Awilcos estimate of 20+ years isn’t overly optimistic.
http://fuelfix.com/blog/2013/05/06/well-plugging-and-abandoning-costs-will-continue-to-add-up-engineer-says/
a few years old but still relevant:
http://www.onepetro.org/mslib/servlet/onepetropreview?id=SPE-100771-MS
Hey all:
Incredible volume today in the USA, over 65k shares traded. That must be a new record.
It is also probably a reaction to the announcement that AWLCF signed the contract on the WilPhoenix at a day rate of $387K.
I also wonder if the “cat is out of the bag” in regards to tomorrow’s earnings announcement?
This will be an important announcement. We will have better clarity on the dividend. I also imagine that it will start showing up on some income screens.
We will see.
So let’s see….complete revenue visibility three years out, pro forma yield still at 21%….Awilco will keep climbing. I am in in size.
Yep:
It is a very efficient market that is pricing this!
Of course, if markets were truly efficient, we wouldn’t be getting any bargains…
The conference call today they mentioned they are looking at potentially buying a new rig. I would prefer they just returned the capital to the shareholders. This could definitely reduce the dividend if they are now making capital acquisitions. What do you think?
I am opposed to any acquisitions. I like the current cash cow strategy. It makes the company extremely easy to value and is very shareholder friendly.
That said, I won’t be selling automatically if they announce a deal. I’ll have to review the economics to see if they can earn a satisfactory return on capital.
They also mentioned that they are not evaluating an opportunity in detail at the moment.
I also like the CEOs statement that growth opportunities should firstly add and not drag value.
This is pretty much in line with another statement from the management I read on a Norwegian website: ” Sometimes there is nothing wrong with just making money.” .
That is why I would rather expect that they are either going for a cheap cold stacked rig like one of Transoceans or maybe snatch one working or new built from a distressed company like Songa instead of ordering a new rig and wait years until it is finished and ready to go.