AWLCF - Awilco Drilling

[Gamecock-YT]

Today is the last day for Hess to declare their option on WilHunter. No news yet, but the stock was hammered up at the close in Oslo.

[BG2008]

AWDR - Hess option for WilHunter expired

 

With reference to our press release of 27 October 2014, Awilco Drilling PLC announces that Hess Limited have allowed their option on WilHunter to lapse.

 

WilHunter is one of Awilco Drilling's two Enhanced Pacesetter semi-submersibles and is equipped for drilling in water depths up to 1,500ft.

 

Aberdeen, 26 February 2015

 

 

For further information please contact:

Jon Oliver Bryce, CEO

Phone: +44 1224 737900

 

Cathrine Haavind, IR Manager

Phone: +47 93 42 84 64

 

[Hielko]

Surprised at the market impact today. Apparently people thought that they would exercise their option?

[matjone]

http://oilpro.com/post/9176/5-reasons-why-transocean-scrapping-7-offshore-rigs-just-beginning

https://whopperinvestments.wordpress.com/2015/02/21/weekend-reading-tisch-on-value-investing/

[bizaro86]

Surprised at the market impact today. Apparently people thought that they would exercise their option?

 

This seems like pretty strong proof that markets aren't efficient to me. Why would anyone think Hess would exercise an option to hire the rig at an above market rate? If markets were anywhere close to efficient that should have been priced in...

[krazeenyc]

Surprised at the market impact today. Apparently people thought that they would exercise their option?

 

This seems like pretty strong proof that markets aren't efficient to me. Why would anyone think Hess would exercise an option to hire the rig at an above market rate? If markets were anywhere close to efficient that should have been priced in...

 

FWIW, Hess exercising the option would not have required it to pay the previous day rate. During one of the conference calls the guys at Awilco explained that Hess renewing the option would be based on whether they needed more time to complete the decommissioning.  Apparently Hess is done. If they needed more time to complete the job, Hess would have renewed, and ideally negotiated a number that worked for both parties.

[bizaro86]

Surprised at the market impact today. Apparently people thought that they would exercise their option?

 

This seems like pretty strong proof that markets aren't efficient to me. Why would anyone think Hess would exercise an option to hire the rig at an above market rate? If markets were anywhere close to efficient that should have been priced in...

 

FWIW, Hess exercising the option would not have required it to pay the previous day rate. During one of the conference calls the guys at Awilco explained that Hess renewing the option would be based on whether they needed more time to complete the decommissioning.  Apparently Hess is done. If they needed more time to complete the job, Hess would have renewed, and ideally negotiated a number that worked for both parties.

 

Ah, that makes more sense, thanks!

[Gamecock-YT]

From the Broyhill Letter:

 

Given the amount of cash we have on hand today, our investors should be hoping for the market to fall, as panicked

sellers give us the opportunity to invest at lower prices, which ultimately drive future returns. We recognize that this is

counterintuitive and may mean short-term losses in those positions we currently hold, but those losses should be less

than those suffered by the overall market, and more than offset by gains from additional purchases. The examples below

should give you a sense of the opportunities we see today, as a result of recent volatility:

 

The collapse in energy prices has wreaked havoc on the oil sector, which has dropped 20% since the summer.

Many stocks in the industry have fallen much further. A recent investment in a Norwegian drilling company

has effectively been cut in half in recent months due to uncertainty around Scottish Independence and the

speculative unwind in commodity-related businesses. In the short-term, we are likely to see continued volatility

in the shares. In exchange for accepting this volatility, we receive the majority of the company’s cash flow in

the form of dividends, which approximate a 30% yield today. The founder owns about half of the shares

outstanding and the company’s rigs were last valued in excess of the total market capitalization.

 

Sounds like Awilco...

 

It was. They're still in.

 

 

There are few moats in the oil drilling

business, but our research indicated that rigs operating in the North Sea benefitted from barriers to entry - in

the form of regulatory hurdles and excessive capital requirements - which limit supply in the region. We were

also attracted to the region’s growing decommissioning work – a source of demand less correlated to oil prices.

We purchased our investment in Awilco as shares declined by a third during oil’s descent only to watch our

investment decline by another third since initial purchase. So why do we own the stock today? Unlike most

equity investments where the majority of a company’s value is in the discounted value of long-term cash flows,

Awilco’s value is front-end loaded. The way we see it, current contracts should generate about half of the

stock's present market capitalization in dividends over the next year. Beyond that, Awilco represents a cheap

option on higher oil prices at some point over the rigs’ seventeen year useful lives.

[Sunrider]

Hi - could you kindly provide a link to the document with the last quote? Can't seem to find it on their site?

 

Thanks - C.

[Gamecock-YT]

Hi - could you kindly provide a link to the document with the last quote? Can't seem to find it on their site?

 

Thanks - C.

 

https://gallery.mailchimp.com/443e8872e35ccdde12b72e8cd/files/Broyhill_Asset_Management_Annual_Letter.pdf

[Sunrider]

Thank you!

Hi - could you kindly provide a link to the document with the last quote? Can't seem to find it on their site?

 

Thanks - C.

 

https://gallery.mailchimp.com/443e8872e35ccdde12b72e8cd/files/Broyhill_Asset_Management_Annual_Letter.pdf

[permabear]

Awilco longs, what are your thoughts now? Still holding on? Planning on buying more?

 

I must admit, I bought Awilco at multiples of the current price. I was blinded by the juicy dividend yield. I'm still holding and contemplating loading up more at $6 and below, should the stock get there.

 

Assuming they can earn $200k net operating profit per day ($300k day rates less $100k opex), the rigs operate for 10 years and they can achieve an average utilization of 75%, I think you can earn a 20% IRR on Awilco (assuming a $6 entry price). This assumes a constant dividend of $1.36/year for the next 10 years. At $6 per share, the enterprise value per rig is ~$112m. They acquired the rigs for $191m (~$96m/rig) in 2010 and have spent at least $100m (~$50m/rig) in upgrades since.

[matjone]

I still have about a 1% position.  I am not sure if I'll average down or not - many rigs are being scrapped and I'm kind of curious what prices people are going to be getting for them.

[permabear]

I think the scrap value is very minimal. Awilco uses $15m residual value per rig.

[matjone]

Yeah it seems that Tisch was buying below scrap value knowing they would not have to be scrapped, whereas we bought above scrap value and they may have to be scrapped after all.  Not saying that will necessarily happen, I just don't know.

[siddharth18]

Looks like the stock is incorporating some cold reality (a possibility of cold-stacking/scraping) that seemed unrealistic just a few months ago.

 

Speaking of scrap value...has anyone calculated at what price would we be getting a free option ? In other words, what price per share represents the profit from contractually guaranteed backlog (assuming zero new contracts)? From the calculation here (http://otcadventures.com/?p=1512) it seems about $170M ($5.6/share) worth of net income is guaranteed to flow between 2015 start and Q2 of 2017, compared to $220M marketcap.

 

The current price of option would hence be around 50 million - or am I missing something?

[Hielko]

Besides yard survey expenses for each rig, I think you also need to account for the fact that they will incur costs for upgrading the BOPs. Don't know how much they have prepaid so far, but total costs should be ~$45 million for both rigs. In addition to this warm stacking or cold stacking Willhunter is presumable not going to be free.

[permabear]

Looks like the stock is incorporating some cold reality (a possibility of cold-stacking/scraping) that seemed unrealistic just a few months ago.

 

Speaking of scrap value...has anyone calculated at what price would we be getting a free option ? In other words, what price per share represents the profit from contractually guaranteed backlog (assuming zero new contracts)? From the calculation here (http://otcadventures.com/?p=1512) it seems about $170M ($5.6/share) worth of net income is guaranteed to flow between 2015 start and Q2 of 2017, compared to $220M marketcap.

 

The current price of option would hence be around 50 million - or am I missing something?

 

I don't know if you can bank on the contractually guaranteed backlog. Diamond Offshore recently disclosed they received requests for early termination, even when this was not contractually allowable:

 

On February 12, 2015, our subsidiary received notice of termination of its drilling contract from Dana Petroleum (E&P) Limited, the customer for the Ocean Nomad. The drilling contract was estimated to conclude in accordance with its terms in August 2015. We do not believe that Dana had a valid basis for terminating the contract, and we intend to defend our rights under the contract.

 

Another example is Hercules Offshore/Aramco. I bet Awilco is having these kinds of conversations. Apache can walk away and leave it up to Awilco to litigate. Awilco would likely choose to amend the contract and take a lower dayrate instead.

[Guest Schwab711]

Looks like the stock is incorporating some cold reality (a possibility of cold-stacking/scraping) that seemed unrealistic just a few months ago.

 

Speaking of scrap value...has anyone calculated at what price would we be getting a free option ? In other words, what price per share represents the profit from contractually guaranteed backlog (assuming zero new contracts)? From the calculation here (http://otcadventures.com/?p=1512) it seems about $170M ($5.6/share) worth of net income is guaranteed to flow between 2015 start and Q2 of 2017, compared to $220M marketcap.

 

The current price of option would hence be around 50 million - or am I missing something?

 

I don't know if you can bank on the contractually guaranteed backlog. Diamond Offshore recently disclosed they received requests for early termination, even when this was not contractually allowable:

 

On February 12, 2015, our subsidiary received notice of termination of its drilling contract from Dana Petroleum (E&P) Limited, the customer for the Ocean Nomad. The drilling contract was estimated to conclude in accordance with its terms in August 2015. We do not believe that Dana had a valid basis for terminating the contract, and we intend to defend our rights under the contract.

 

Another example is Hercules Offshore/Aramco. I bet Awilco is having these kinds of conversations. Apache can walk away and leave it up to Awilco to litigate. Awilco would likely choose to amend the contract and take a lower dayrate instead.

 

This is exactly how it happens. Think if you had 2-year cell phone agreements for each of your 5 employees but you fired 3 of them. Would you continue to pay for 5 phone plans or calculate the break-even? Contractually Guaranteed doesn't mean "Put a gun to their head". I think this a really common mistake and they generally only get caught through mistakes or really putting yourself in the company's situation.

[jawn619]

So let me get it straight,

This company has a

220,731,525(market cap) + 139,697,000(debts) - 75,951,000(cash) = about 250mil enterprise value

 

In the next year they are guaranteed through contracts to have 478,000,000 in 2015 of revs. This translates to around 170mil of ebitda.

 

So main concerns are will Awilco be able to collect the guaranteed contract amounts and then will they be able to renew their contracts or find anyone to lease off them where the environment for renewals doesn't look good.

 

 

[Guest Schwab711]

So let me get it straight,

This company has a

220,731,525(market cap) + 139,697,000(debts) - 75,951,000(cash) = about 250mil enterprise value

 

In the next year they are guaranteed through contracts to have 478,000,000 in 2015 of revs. This translates to around 170mil of ebitda.

 

So main concerns are will Awilco be able to collect the guaranteed contract amounts and then will they be able to renew their contracts or find anyone to lease off them where the environment for renewals doesn't look good.

 

Basically, yes. The odds are high that the contracts will be carried out with the current terms, I was just trying to point out the bear case (since I've been burned by guaranteed contracts before). But you would need to know the contract termination terms to know the actual bear case for the stock. I'm not familiar with the depreciation cycle but the rigs may very well be held on the BS at higher carrying value than the current market value. AWLCF doesn't appear to have the liquidity to withstand a contract termination(s) or delays in future contract signings.

 

Remember as well that we are looking FCF to exceed EV such that ((Sum(FCF) - EV)*(1+g)^n)/(1 + r)^n => g > 10% (n = 2 or 3 probably; and I'm sure most of us are shooting for "g" much higher than 10%). Once you apply a discount for a relatively high capital loss scenario (Possibly as low as 50% - 60% loss currently) than AWLCF really should trade below EV to make it a worthwhile risk given the environment.

[siddharth18]

All valid points, but isn't there a difference between a state owned company like Aramco/Pemex and an independent like Hess/Apache? I would presume that the contract is governed by UK/Scottish laws where the contract is fully enforceable? What would Hess/Apache possibly gain from breaking the contract and dragging this out? Apart from losing the case, millions in legal fees and losing reputation...? And it's not like either of those companies is on the verge of bankruptcy or starving for liquidity...

 

 

If Awilco suspected such a move, they could simply suspend their dividend to maintain a bigger cash hoard (excess cash is around $30M already).

 

 

I think the bottom line is that it depends in the fine print of the contract. Would've been much worse if the rigs were leased to Pemex where they include a 30-day termination clause in the contract and enforcing a contract against a NOC in its home country is an uphill battle.

 

 

Regarding the BOPs - does anyone know if they have resale values in case the rigs are scrapped?

 

 

It's really telling how (last year) there was little focus on rig scrap values due to the "rig expiration" date being 2031...compared to now.

[Mephistopheles]

I'm doing some preliminary research on this stock and am wondering if anyone can help me answer a few questions, or point me in the right direction to figure it out:

 

1. From now until the contracts end, how can we think about what kind of additional capex the rigs will need? For example, I've heard they will need to upgrade BOPs; but I can't find any info on this in the AR. They did upgrade the rigs in '09 and the contracts will be ending in a couple of years; will there really be a need for new BOPs? What other costs can one reasonably expect?

 

2. If oil stays this low forever, it's safe to say that the rigs will be cold stacked, then sold or scrapped. What are the costs for cold stacking North Sea rigs? And what is a reasonable expectation for the length of time they would do this before throwing in the towel? Management seems to be shareholder friendly and opportunistic, so I would assume that they wouldn't wait around too long for a new contract.

 

This seems to be a pretty straightforward investment. Just add and subtract, and assign probabilities on the free upside option vs. the maximum downside loss. I just want to learn how to think about what inputs I need to put in and where to get them from.

 

Thanks

[siddharth18]

I'm doing some preliminary research on this stock and am wondering if anyone can help me answer a few questions, or point me in the right direction to figure it out:

 

1. From now until the contracts end, how can we think about what kind of additional capex the rigs will need? For example, I've heard they will need to upgrade BOPs; but I can't find any info on this in the AR. They did upgrade the rigs in '09 and the contracts will be ending in a couple of years; will there really be a need for new BOPs? What other costs can one reasonably expect?

 

2. If oil stays this low forever, it's safe to say that the rigs will be cold stacked, then sold or scrapped. What are the costs for cold stacking North Sea rigs? And what is a reasonable expectation for the length of time they would do this before throwing in the towel? Management seems to be shareholder friendly and opportunistic, so I would assume that they wouldn't wait around too long for a new contract.

 

This seems to be a pretty straightforward investment. Just add and subtract, and assign probabilities on the free upside option vs. the maximum downside loss. I just want to learn how to think about what inputs I need to put in and where to get them from.

 

Thanks

 

1. Here is what I got from IR regarding capex - http://i.imgur.com/yj6v5xw.png

 

2. Yeah scrapped or sold...If Awilco can't run the rigs profitably, who else can? If I recall correctly, the cold stack shouldn't run more than a couple of million dollars per rig...I could be wrong. Regarding what management might or might not do, it just depends on what the parent company's outlook on oil price is. They have been in this game for longer than anyone else so the decision ideally shouldn't be monumentally stupid.

 

[Mephistopheles]

I'm doing some preliminary research on this stock and am wondering if anyone can help me answer a few questions, or point me in the right direction to figure it out:

 

1. From now until the contracts end, how can we think about what kind of additional capex the rigs will need? For example, I've heard they will need to upgrade BOPs; but I can't find any info on this in the AR. They did upgrade the rigs in '09 and the contracts will be ending in a couple of years; will there really be a need for new BOPs? What other costs can one reasonably expect?

 

2. If oil stays this low forever, it's safe to say that the rigs will be cold stacked, then sold or scrapped. What are the costs for cold stacking North Sea rigs? And what is a reasonable expectation for the length of time they would do this before throwing in the towel? Management seems to be shareholder friendly and opportunistic, so I would assume that they wouldn't wait around too long for a new contract.

 

This seems to be a pretty straightforward investment. Just add and subtract, and assign probabilities on the free upside option vs. the maximum downside loss. I just want to learn how to think about what inputs I need to put in and where to get them from.

 

Thanks

 

1. Here is what I got from IR regarding capex - http://i.imgur.com/yj6v5xw.png

 

2. Yeah scrapped or sold...If Awilco can't run the rigs profitably, who else can? If I recall correctly, the cold stack shouldn't run more than a couple of million dollars per rig...I could be wrong. Regarding what management might or might not do, it just depends on what the parent company's outlook on oil price is. They have been in this game for longer than anyone else so the decision ideally shouldn't be monumentally stupid.

 

 

Thanks siddharth! Very helpful