AWLCF - Awilco Drilling

[shhughes1116]

An investment in Awilco is essentially a determination of probability.  It is most likely that these rigs continue to operate for the duration of their usable life; which is another 17 years.  So the question is whether the sum of dividends over that time results in a sufficient return relative to your perceived risk of this investment.  This becomes an exercise in probability. Is the probability that rig day rates remain above their 2009 lows greater than the probability of day rates dropping below the 2009 lows?  I think that 2009 lows will turn out to be the bottom, and to be honest, I think the recent transocean day rate for Transocean Leader (335k/day) is probably close to the bottom in the North Sea.  If that's the case, then the free cash flow is sufficient to recoup your investment over the life of these declining asserts, plus a modest return. 

[SwedishValue]

Then why aren't majors buying them up instead of spinning them off?

 

I do not see how this has anything to do with the price.

 

Also, I don't know.

[shhughes1116]

They are spinning them off because they are levered and need the cash.  In the case of Transocean, they are spinning off partial ownership in Caledonia because they need the cash and because I think they feel that the relatively stable North Sea business deserves a higher multiple than what they are receiving currently when tucked into Transocean. 

[ItsAValueTrap]

They are spinning them off because they are levered and need the cash.  In the case of Transocean, they are spinning off partial ownership in Caledonia because they need the cash and because I think they feel that the relatively stable North Sea business deserves a higher multiple than what they are receiving currently when tucked into Transocean.

 

Spinoffs hurt liquidity rather than help liquidity.

[matjone]

I remember last time I looked at the drillers there were running mid 80's rig utilization IIRC.  If you combine that with a dayrate decline of 15% or more maybe this turns out to be just an average investment?

 

 

[shhughes1116]

They are spinning them off because they are levered and need the cash.  In the case of Transocean, they are spinning off partial ownership in Caledonia because they need the cash and because I think they feel that the relatively stable North Sea business deserves a higher multiple than what they are receiving currently when tucked into Transocean.

 

Spinoffs hurt liquidity rather than help liquidity.

 

If they were using the cash to simply delever the balance sheet, then I would completely agree with you.  However, I believe the intention is to use this cash to pay for newbuilds that have been ordered and are nearing completion.   

[Palantir]

I don't understand the thesis for this investment. Day rates have been steadily rising for the past few years, however, oil prices have been falling for the last year. The major players in this space are spinning off their old rigs, and that's what is left for investors to buy, and that too in an industry renowned for being risky and levered to commodity prices.....I just don't see why this is attractive.

 

I bought some this week. Their existing contracts should produce $6-7 in dividends over the next six quarters. That's half the $14 price right there.

 

If oil rebounds or even stays at these levels, I think they will get new contracts.

 

That's how I see it. Speculative but a good bet.

 

Here's the deal though, the contracts are, I believe about 2 years long on average? So even if you get your money back withing 2 years, and the new contracts entered into are significantly lower, it could make it a much more average returning asset from there on out. What are you anticipating rates to be there?

[Libs]

I don't understand the thesis for this investment. Day rates have been steadily rising for the past few years, however, oil prices have been falling for the last year. The major players in this space are spinning off their old rigs, and that's what is left for investors to buy, and that too in an industry renowned for being risky and levered to commodity prices.....I just don't see why this is attractive.

 

I bought some this week. Their existing contracts should produce $6-7 in dividends over the next six quarters. That's half the $14 price right there.

 

If oil rebounds or even stays at these levels, I think they will get new contracts.

 

That's how I see it. Speculative but a good bet.

 

Here's the deal though, the contracts are, I believe about 2 years long on average? So even if you get your money back withing 2 years, and the new contracts entered into are significantly lower, it could make it a much more average returning asset from there on out. What are you anticipating rates to be there?

 

No Called Strikes has an earlier post with some assumptions (rough) on how much of a decline in rig prices would impact dividends and thus share price.

 

Even with a 35% decline in rig rates, the dividend would support a $14 stock price, assuming a required 13% dividend rate. ( Note the many caveats he noted).

 

I'm fully prepared to take a loss if things get worse than that.

 

 

 

 

 

[Fat Pitch]

Looks like Awilco is back to the price I originally purchased at before selling it in the mid 20s. Company is pretty cheap, but your main risks are tax rate, blowouts and day rates. Management looks sensible enough to just run off these assets.

 

Size positioning is key. Can’t buy too much since there are real risks you have permanent impairment of capital. This isn’t bad in a basket of other securities in different sectors (Canadian pipeline construction, O&G, etc).

[Tim Eriksen]

Very strong quarter.  EPS of $1.27. 

http://hugin.info/147077/R/1870602/657887.pdf

 

[DTEJD1997]

Hmmm:

 

Maybe the world is NOT coming to an end?  The "fast money" crowd came piling in and then panicked to get out.  They love to buy high and sell low.

 

Looks like we will have a nice up day.

 

Another $1.15/share dividend.  This will be seven dividends coming up for my original purchase.

 

Excellent earnings and cash flow.  Appears that way for at least another year...

 

Makes me wish I got more under $14/share.

 

 

[writser]

Hmmm:

 

Maybe the world is NOT coming to an end?  The "fast money" crowd came piling in and then panicked to get out.  They love to buy high and sell low.

 

Looks like we will have a nice up day.

 

Another $1.15/share dividend.  This will be seven dividends coming up for my original purchase.

 

Excellent earnings and cash flow.  Appears that way for at least another year...

 

Makes me wish I got more under $14/share.

 

Frankly I think that's a bit too short-sighted. Obviously this quarter was going to be very good because both rigs were already booked at attractive rates. The next quarters will be great as well. That's no news at all. The stock has been sold down because investors are afraid dayrates are coming down after the current contracts expire. Whether that will happen (and thus whether Awilco will be a great investment at $14) is still not clear as far as I am concerned. Nevertheless I am still holding, looks like a decent bet.

 

With regards to the Hess option postponement: I'd say that deferring the decision is a slight negative. Maybe Hess is shopping around or trying to squeeze Awilco - if they badly need a rig and the market was tight they would probably sign a contract right away. But I don't think it's an extremely relevant piece of information.

 

According to todays' presentation management expects 2015 maintenance costs to be around $60m in total.

 

- Routine capex $20m

- BOP commitment $25m

- SPS $15m

[siddharth18]

Is the hess option postponement a good sign or a bad sign? It at least shows that Hess may be thinking about renewing, but it shows that they want to push it off till last minute so they don't get whacked by potentially lower oil prices if they accept now.

 

IMO Hess is waiting for oil price volatility to decline and oil prices to begin to firm and to get more clarity about the IRR in their projects going forward. It's a lessor's market and they know it. Maybe the fact that they are willing to still consider Awilco's rigs is a sign that they are still somewhat interested in Awilco's rigs (due to Awilco's proven expertise?) and would rather take Awilco's rigs, if they were to take any.

 

It's still better than them flatly declining to renew the option.

 

Today's results mean nothing new, really. For a stock like Awilco with so much visibility/transparency, current backlog, which means everything for the current shareholders, ironically means nothing for the stock price. Guidance and business after current backlog ends, means everything.

[shhughes1116]

Keep in mind that the contract work for Hess is well abandonment work...it will continue to occur regardless of the price of Brent crude....Hess knows this and Awilco knows this.   

 

Hess is simply squeezing Awilco by postponing the decision.  My guess is that come February, both parties will agree to scrap the option and come to an agreement on a longer contract at a dayrate lower than what is specified in the current option, thus enabling Awilco to continue with the well abandonment work.  Hess wins by getting a lower dayrate while Awilco wins by getting some longer-term visibility on cash flow.  More importantly, given the recent contracts signed for the Transocean Leader and Songa Dee in the Norwegian area of operations, along with the recent cold stacking of the Borgny Dolphin in the UK area of operations, I think the floor for dayrates in the UK are higher than the market anticipates.   

[shhughes1116]

I stand corrected.  According to the conference call, the unpriced option was postponed because Hess was not sure if they would need the rig. 

[shhughes1116]

m.seekingalpha.com/pr/11711205-paragon-offshore-announces-acquisition-of-a-majority-stake-in-prospector-offshore

 

Paragon offshore purchases prospector offshore.  Prospector offshore listed in Oslo... Operates two high spec jackups in the North Sea, with three more contracted for delivery. 

[Gamecock-YT]

I'm wondering if this is where the Awilco Drilling money went? They also sold back shares in Royal Caribbean earlier this month for ~$500mm

 

Awilco Eco Tankers books another pair of VLCCs at South Korean yard at a cost of $97m each for delivery in 2016 and 2017

The Anders Wilhelmsen (Awilhelmsen) group of Norway and US-based investor Wilbur Ross are ordering two more 320,000-dwt tankers at South Korea’s DSME.

 

They are likely to be delivered either late in 2016 or early in 2017 and are costing $97m each.

 

The newbuildings have been ordered by Awilco Eco Tankers, a 50:50 joint venture between Awilhelmsen and Ross-controlled Transportation Recovery Fund (TRF).

 

Earlier this year, the venture ordered two sisterships for delivery in 2016 at the same price, which was considered attractive as, today, it would cost at least $100m to order a VLCC at a yard such as DSME.

 

Meanwhile, Awilhelmsen this week sold 3.5 millon shares in Royal Caribbean Cruises for NOK 3.2bn ($500m). The Norwegian company still holds 16% of the stock, making it the cruise giant’s biggest shareholder.

 

Four years ago, Awilhelmsen sold one millon shares in the company.

 

Last year, Awilhelmsen had a pre-tax profit of NOK 1.528bn, with the cruise gains totalling NOK 1.17bn. Managing director Sigurd E Thorvildsen says the sale will free up capital for Awilhelmsen to invest in its other business areas, including shipping.

 

Thorvildsen says the company is considering further tanker investments.

 

Last year, it sold three suezmax tankers. Ridgebury Tankers took the 164,000-dwt Wilsky (built 2009) for $43.3m, while two 1997-built units also went for further trading.

 

Awilhelmsen also has a 33.7% stake in listed Awilco LNG, which has a fleet of five LNG carriers and a 48.7% stake in Awilco Drilling.

 

Anders Wilhelmsen was formed in 1939 and is owned by the families of brothers Arne and Gjert Wilhelmsen.

[CorpRaider]

Wow, Seadrill, NADL news is decimating this entire group today.  Anyone around in the mid 80's (or not) know of any rules of thumb for bottom of cycle p/b ratios in this industry? 

[siddharth18]

The entire rig market is feeling the tremors of SDRL's decision to ELIMINATE its dividend. The fact that one of the richest, smartest, most aggressive, most generous player in the rig market - John Fredriksen - contradicted himself (mislead the market?) by saying the div is secure until 2016, then within a few months deciding to not reduce it...but ELIMINATE it. Not only that, JF even increased his personal position in SDRL not long ago...

 

Awilco's price per share is is below $12 as we speak...around $6 in earnings is contractually guaranteed. Any thoughts here? There are concerns that NADL's rigs will compete with AWLCF's.

[ItsAValueTrap]

Wow, Seadrill, NADL news is decimating this entire group today.  Anyone around in the mid 80's (or not) know of any rules of thumb for bottom of cycle p/b ratios in this industry?

 

I think you're looking at it the wrong way.  Figure out the market value of their ships.  Then figure out if the stock is trading at a discount to the sum of the parts.

 

George Economou does this arbitrage all the time.

[plato1976]

$6 doesn't matter b/c as I believe they also carry a ton of debts

If they cannot make much money after these contracts it may be worth very little

All depend on oil price...

 

The entire rig market is feeling the tremors of SDRL's decision to ELIMINATE its dividend. The fact that one of the richest, smartest, most aggressive, most generous player in the rig market - John Fredriksen - contradicted himself (mislead the market?) by saying the div is secure until 2016, then within a few months deciding to not reduce it...but ELIMINATE it. Not only that, JF even increased his personal position in SDRL not long ago...

 

Awilco's price per share is is below $12 as we speak...around $6 in earnings is contractually guaranteed. Any thoughts here? There are concerns that NADL's rigs will compete with AWLCF's.

[plato1976]

Nice idea

Yes, fleet price with some discount and then minus debt may be the best way to have a conservative estimation on the entry to this distressed asset

 

Wow, Seadrill, NADL news is decimating this entire group today.  Anyone around in the mid 80's (or not) know of any rules of thumb for bottom of cycle p/b ratios in this industry?

 

I think you're looking at it the wrong way.  Figure out the market value of their ships.  Then figure out if the stock is trading at a discount to the sum of the parts.

 

George Economou does this arbitrage all the time.

[ItsAValueTrap]

I forgot to mention that you need to include the value (or un-value) of any long-term contracts that the company has entered into.

[CorpRaider]

Yeah, thanks for the advice.  I just wondered if there is a quick rule of thumb for bottom of cycle price to books to use as indicia that we're in the neighborhood of distressed levels before picking a target to deep dive (e.g., in '86 we got to .33 p/b).  I will probably just wait for Berkowitz and/or Icahn to get more aggressive.  I don't have access to data to get anything other than a "precisely wrong" market value for the fleets (of course I will be fine with that after I know I'm "roughly right" and just fine tuning) and I don't want to underwrite the contracts, I'm looking for nuclear winter type margin of safety with potentially distressed counterparties.  I also don't really like the business, with the cycles and the capital intensity and the E&P companies trying to stick you with the costs when you have a blowout or crew gets killed, etc...actually I think I just talked myself out of it.  ;D

[shhughes1116]

Nice idea

Yes, fleet price with some discount and then minus debt may be the best way to have a conservative estimation on the entry to this distressed asset

 

Wow, Seadrill, NADL news is decimating this entire group today.  Anyone around in the mid 80's (or not) know of any rules of thumb for bottom of cycle p/b ratios in this industry?

 

I think you're looking at it the wrong way.  Figure out the market value of their ships.  Then figure out if the stock is trading at a discount to the sum of the parts.

 

George Economou does this arbitrage all the time.

 

Awilco is a distressed asset?  I think that is a bit extreme.  Contract drilling is a cyclical business, and they are entering a trough in the cycle.