AWLCF - Awilco Drilling

[siddharth18]

The ENTIRE rig sector is experiencing weakness, and in my opinion there are some good values to be found. The weakness is caused by the fear that oil majors are cutting back on capex to return more capital to shareholders. On the other hand...reserves are harder to replace, and the companies are forced to drill in newer/exotic markets and at a higher depths.

 

At the same time, Macondo forced the oil majors to prefer newer, higher spec rigs over older, low spec rigs due to safety reasons. That is the reason why you see a lot of legacy rig companies (like transocean, Noble) seeing weakness. This is the reason why you see spinoffs and MLP creations from the older rig companies. In other words, there's a huge bifurcation going on in the rig market.

 

So the way I think it plays out is that companies like Seadrill - the ones that have the newest/best/most sophisticated fleet will see the least downside (in terms of rig utilization at least). Because companies like Transocean are stuck with old rigs they will bear the brunt of any cuts in drilling capex.

 

What makes it worse for old rig owners is that ever few years, time comes for SPS (periodic surveys) which cost a lot of money. And without SPS you can't lease the rig. So they must decide if they want to spend tens of millions of dollars on something that's is already unpopular and becoming less so going forward.

 

IMO, a company like SDRL that pays 11-12% div yield is a pretty good value as long as you aren't a huge bear on oil.

 

As for Awilco, I believe it has been rather insulated due to it being in North Sea. Regulations, harsh weather certification and the fact that they are among the best (or soon will be best with newer BOPs) among their cohort.

 

What I fear is that if the older rigs that don't get utilization in north america, africa, middle east, asia - start moving en masse to north sea and compete with WilHunter and WilPhoenix.

 

Also I think the risk reward at this price isn't that good. SDRL for example, is more diversified and has an attractive FCF yield, comparable to AWLCF, is more diversified, has newer fleet and has equally shrewd owner-operator (John Fredriksen).

 

Having said all this, I'd love to get into the mind of the CEO/CFO/Awilhelmsen and find out how they see it playing out. If we're near the peak, why aren't they looking to sell? Do they really want to run these rigs until 2030 ?

[Palantir]

So I'm trying to model this firm....anyone know where they came up with the Change in Trade Accounts Receivable on the Group Cash Flow statement? Can't see how they derived that figure.

[SpecOps]

I'm still long AWDR, but unsure what to make of their future. In terms of costs when they go into the yards in the next couple of years, last time they spent about $110m and that was with upgrades so I think the costs will be well below this.

 

In terms of the market, if you look at their results presentation p14 they show a chart of total market of rigs and number contracted. Utilization is high at the moment but has been that way since 2007. The number of rigs has stop decreasing after decade long falls.

 

http://i.imgur.com/zrYKmSF.png

 

But it shows huge drops in utilisation occurred starting in 1999 and then 2002. If that kind of thing happens again day rates will go much lower.

 

Part of me thinks that for this cyclical industry we are currently in a good period and have been since 2006.

[CorpRaider]

Seadrill giving a pretty negative outlook for the industry today.  Plans to stop all new rig orders until market turns.  Too bad they already have 18 rigs en route.

 

http://finance.yahoo.com/news/rig-company-seadrill-hit-profit-081150044.html

 

I've been looking at this one and RIG.  Seems like RIG has the most exposure to the ultra deep water and maybe a bit better balance sheet now that they've done the MLP.  Also, have Icahn in that one.  Could be in for a really long and deep trough though, especially if fracking goes global.

[Hielko]

meh: http://www.newsweb.no/newsweb/search.do?messageId=360172

 

The Awilhelmsen Group (through Awilco Drilling AS)

has today sold 1,634,162 shares in Awilco Drilling

PLC ("AWDR" or the "Company") at a price of NOK 120

per share. After the transaction, the Awilhelmsen

Group (through Awilco Drilling AS) owns 12,998,938

shares, or 43.3% of the registered share capital in

the Company. The Awilhelmsen Group is committed to

continue to be a long-term industrial owner of AWDR.

and: http://www.newsweb.no/newsweb/search.do?messageId=360173

On 2 September 2014, funds managed by QVT Financial

LP ("QVT") sold an aggregate 365,838 shares in Awilco

Drilling Plc at a price of NOK 120 per share.

[Palantir]

Steadily rising day rates, majors spinning off assets, and now management selling shares....hmmm.

[siddharth18]

Not much discussion going on here....but the biggest shareholder has decreased their stake and so has one of their non-executive BoD...at ~$20/share - a price materially lower than just a few weeks ago. A narrative coming from the management of these rigs lasting until ~2030 is nice and so is the "yield" of around 20% in a zero interest environment ...

 

 

Where does that leave us as the uninformed, minority shareholders who are the last ones to know and the most likely to get screwed if/when things take a turn for the worse?

[Tim Eriksen]

Not much discussion going on here....but the biggest shareholder has decreased their stake and so has one of their non-executive BoD...at ~$20/share - a price materially lower than just a few weeks ago. A narrative coming from the management of these rigs lasting until ~2030 is nice and so is the "yield" of around 20% in a zero interest environment ...

 

 

Where does that leave us as the uninformed, minority shareholders who are the last ones to know and the most likely to get screwed if/when things take a turn for the worse?

 

Great question.  I think management is very wise.  They made an excellent purchase in 2010, after shrewdly exiting the market a few years earlier.  On the other hand, they materially diluted their ownership in an IPO at $4 (late 2010) and then $5 (in 2011).  That was clearly unwise.  No one is going to have a perfect track record, not even insiders.  And we don't know why they trimmed their position. 

 

The challenge with the investment (and I am still long) is that every quarter things will appear to "get worse."  In other words for a few quarters we will get nearer the yard maintenance and a probable skipped or reduced dividend, and backlog will likely decrease.  The market likes positive news.  That is just the way it is.  So bumps like this will happen.  The investors expecting a home run, or $35 to $40 per share will probably sell.   

 

If we look long term, things are not getting worse.  Awilco will generate approximately $9 to $12 per share (or 45% to 60% of current share price) in free cash flow over the next three years (depending on whether WilHunter option is picked up).  How many businesses will do that??  Not many.  I am comfortable owning the assets for a net price of $10 per share ($350 million enterprise value, if for simplicity I assume stock price falls the same as dividend) three years out.  The investors expecting to have a real return near the dividend yield should be pleased.

[GregS]

Not much discussion going on here....but the biggest shareholder has decreased their stake and so has one of their non-executive BoD...at ~$20/share - a price materially lower than just a few weeks ago. A narrative coming from the management of these rigs lasting until ~2030 is nice and so is the "yield" of around 20% in a zero interest environment ...

 

 

Where does that leave us as the uninformed, minority shareholders who are the last ones to know and the most likely to get screwed if/when things take a turn for the worse?

 

Hard to speculate as there are many possible reasons for the sale, but with Awilhelmsen Group retaining 43% ownership they still seem to believe in the company.

[NoCalledStrikes]

If you are holding Awilco shares in a Fidelity taxable account, you may benefit from this dip in price.

 

This spring I learned that my Awilco dividends at Fidelity were going to be reported as "non-qualified" or ordinary dividends. No amount of arguing with Fidelity could change their minds since their auditor makes all their decisions for them.  At one point, I even had to explain to them that the reason the US doesn't have a tax treaty with England where Awilco is incorporated is because England is part of Great Britain!

 

As the gap between ordinary and qualified dividends is up to 18%, this cost me a meaningful chunk of change. Fortunately, TD Ameritrade considered my AWLCF dividends with them as qualified and even my Fidelity IRA does not require foreign taxes withheld on the dividends either (which means they are qualified by the definition of the tax treaty, right?), so my issue is only with Fidelity's taxable account.

 

The obvious thing to do is to move my shares from my Fidelity taxable account to a more favorable account, but there are tax consequences to selling and TDAmeritrade won't accept my AWDR:NO shares in a transfer as they only accept AWLCF and can't arrange for a non-taxable conversion of my Oslo and pink sheet shares.  Well courtesy of the dip in price this week, I sold my highest costs basis shares at Fido this morning for a negligible profit and purchased new shares in my Roth to offset.

 

 

 

 

 

 

 

 

[tytthus]

You don't have to file exactly as fidelity presents your 1099.  File the dividends as qualified and include a note why.  You are right and fidelity is wrong.

[NoCalledStrikes]

You don't have to file exactly as fidelity presents your 1099.  File the dividends as qualified and include a note why.  You are right and fidelity is wrong.

 

I considered that option, but life is short, and I didn't want to spend it answering a letter from the IRS asking me why I thought I knew more about taxes than Price Waterhouse.

[siddharth18]

Much volatility and nervousness has accompanied the latest sale. Even assuming an average of $3 dividend going forward that's 16% yield at current prices. There's quite a lot of abandonment work that's needed to be done in the north-sea which is insensitive to oil prices. With new BOPs they'll be among the attractive ones that'll be the first to find work...What am I missing? Is it just that the market needs to vent out the frustration of the insider sale, by dropping the prices even more?

[gary17]

don't forget about the geopolitical risks of scotland independence :) 

[GregS]

There's obviously been a lot of concern and speculation about the stock sale, but do we know anything about who purchased the shares?

[siddharth18]

don't forget about the geopolitical risks of scotland independence :) 

 

I have no idea what ramifications this will have but if I had to guess, I'd say higher tax rates? Can anyone share more color on this?

 

There's obviously been a lot of concern and speculation about the stock sale, but do we know anything about who purchased the shares?

 

There isn't much discussion about it, because everyone is assuming (for which I don't blame them) that the smarter/more well-informed party of this transaction is the seller, not the buyer, because the former is the insider, not the latter.

 

 

I guess we'll have to wait and see until the next quarterly report and try to find the recipient of the shares that changed hands, as there has been no disclosure so far from either Awilco or Oslo Bors.

[GregS]

There's obviously been a lot of concern and speculation about the stock sale, but do we know anything about who purchased the shares?

 

There isn't much discussion about it, because everyone is assuming (for which I don't blame them) that the smarter/more well-informed party of this transaction is the seller, not the buyer, because the former is the insider, not the latter.

 

 

I guess we'll have to wait and see until the next quarterly report and try to find the recipient of the shares that changed hands, as there has been no disclosure so far from either Awilco or Oslo Bors.

 

That's the logical conclusion.  But it seems possible (likely?) that it was one buyer and they just bought a big chunk of the company.  It's not like Awilhelmsen were dumping shares on the open market.  Hopefully we will get some disclosure soon.

[NoCalledStrikes]

don't forget about the geopolitical risks of scotland independence :) 

 

I have no idea what ramifications this will have but if I had to guess, I'd say higher tax rates? Can anyone share more color on this?

 

 

While higher taxes is generally a good guess, it is not a certainty.  Since Scotland depends on the North Sea not just for revenue but for jobs, you might see more tax breaks for energy work that extends the life of old fields and keeps more people employed. For instance in the U.S., the call for higher energy taxes doesn't come from the politicians of oil producing states but from the politicians of the consuming states.

[Gamecock-YT]

Hit below 100 NOK in Oslo today.

[phil_Buffett]

Hit below 100 NOK in Oslo today.

 

amazing Panic. very greedy to buy more

 

 

edit: i bought more today. absolutely stunning how the stock Drops in 1 month period. dividend is still there and for me there is to much Panic.

[scorpioncapital]

Could there be a legitimate reason for the drop? Something the market knows that we don't such as a drop on profits or use of rigs?

[Gamecock-YT]

Could there be a legitimate reason for the drop? Something the market knows that we don't such as a drop on profits or use of rigs?

 

We'll find out in October if Hess picks up the WilHunter's 275 day option, with the stipulation that the day rate can/will decrease should they decide to exercise to option. Other than that, day rates are locked in until the end of 2015.

 

 

Edit: This could be the short-term floor with dividends coming in at the end of the week and DRIPs becoming active.

[matjone]

Where are you guys buying this, and what is the commission?

[Gamecock-YT]

Scottrade $7, TDAmeritrade $10 + $15 foreign stock fee

[siddharth18]

http://fortune.com/2014/09/12/scotland-uk-energy-north-sea/