AWLCF - Awilco Drilling

[zippy1]

I wonder if it is trading ex-dividend today in Norway.

 

Packer

http://www.awilcodrilling.com/4142-Financial-News-Message?msg=http://cws.huginonline.com/A/147077/PR/201311/1743211.xml

Reference is made to the third quarter 2013 report released on 14 November 2013. Awilco Drilling PLC will be trading ex-dividend of a cash dividend of US$1.10 per share on 20 November 2013. The record date is 22 November 2013 and the dividend will be paid on or about 20 December 2013.

[Hielko]

I wonder if it is trading ex-dividend today in Norway.

 

Packer

Ex-div date was indeed a week ago, but it's apparently down because a fund sold a big block of shares at a discount. From twitter:

QVT fund sold over 1.7 m shares at bookbuilding process with price 127 NOK.

[Hielko]

More info from http://www.newsweb.no/newsweb/search.do?messageId=340979

 

QVT has retained Arctic Securities ASA ("Arctic") and

Fearnley Securities AS ("Fearnley") as joint

bookrunners to explore the sale of up to 1,172,300

shares of AWDR through an accelerated bookbuilding

process.  The shares to be sold are held by two

liquidating funds (due for wind-up by December 31,

2013) managed by QVT. 

 

The shares to be sold are 100% of the holdings in

AWDR of those two liquidating funds and are their

last remaining substantial holding. Additionally,

there are no other funds managed by QVT seeking to

sell shares of AWDR in this placement, and there are

no other liquidating funds managed by QVT (and

consequently there are no shares in AWDR held by any

other liquidating funds managed by QVT).

Best reason possible for a drop imo

[abyli]

Did anyone receive November dividend? I am using Scottrade and I have not received dividend yet. Thanks.

[gary17]

i believe they said around dec 20th - just in time for xmas =)

 

AWDR - Dividend Information

Reference is made to the third quarter 2013 report released on 14 November 2013. Awilco Drilling PLC will be trading ex-dividend of a cash dividend of US$1.10 per share on 20 November 2013. The record date is 22 November 2013 and the dividend will be paid on or about 20 December 2013.

[roughlyright]

I thought Awilco will fall once this funds managed by QVT start selling. I am so disappointed that there was no drop in the price at all  >:( 

 

anybody has insights into why there is no drop in price at all despite selling off so many shares from this QVT fund?

[Hielko]

I thought Awilco will fall once this funds managed by QVT start selling. I am so disappointed that there was no drop in the price at all  >:( 

 

anybody has insights into why there is no drop in price at all despite selling off so many shares from this QVT fund?

They sold all the shares that needed to be sold on a single day, placing them directly with other investors. There hasn't been any selling since 28 November.

[Gamecock-YT]

Pretty sure they dumped them all on the Oslo exchange on Thanksgiving Day (US). Lots of reference to the stock price dropping 8-10% that day. From the filing's I've read it looks like they sold everything they needed to sell. But I am liking the little sell off we've had this week, I've bought in on some more shares.

[Olmsted]

Anyone have any insight into the Awilco move this morning? All I can find is a Finnish tweet about a market rumor about higher UK taxes.

[siddharth18]

Anyone have any insight into the Awilco move this morning? All I can find is a Finnish tweet about a market rumor about higher UK taxes.

 

The payroll tax that increase that's going to affect all UK based companies?

[Gamecock-YT]

Anyone have any insight into the Awilco move this morning? All I can find is a Finnish tweet about a market rumor about higher UK taxes.

 

That's my guess as well, and there's no guarantee that the tax passes. O&G companies are lobbying hard to fight it. Hopefully price stays low so we can re-invest the dividends.

[no_thanks]

Anyone have any insight into the Awilco move this morning? All I can find is a Finnish tweet about a market rumor about higher UK taxes.

 

That's my guess as well, and there's no guarantee that the tax passes. O&G companies are lobbying hard to fight it. Hopefully price stays low so we can re-invest the dividends.

 

Do you have your broker automatically reinvest dividends from this?  How does that work on more illiquid stocks?  Thanks.

[siddharth18]

From another message board:

 

 

We believe today's dip in the share price is due to a new tax proposal put

forward by the HMRC (The British tax authorities) late last week. The proposal

could potentially increase Awilco Drilling's effective tax rate at a group

level. A consultation period for the proposal is scheduled for January 2014 and

the final outcome is therefore not yet known. It is also worth noting that the

proposal has been pushed through by the HMRC and has not necessarily been

approved in principal by the Treasury. The Treasury has previously indicated

that there would be no more "tax surprises" for the oil & gas sector, and that

they would be more interested in ensuring the longer term benefits that can be

reaped from a stable oil & gas sector rather than a short term hit. There is

currently a strong pushback form the oil & gas industry on this proposal and

several meetings with both the HMRC and the Treasury will take place to present

the Industry's view on the proposal. Until the consultation period is over and

we know more of its outcome, it is difficult to be more specific of any

potential consequences.

 

 

Kind regards,

Cathrine Haavind

 

 

Does anyone an idea about what's the likelihood of this proposal passing? And if it does pass, what's the likely hit to the bottom line for Awilco?

[Gamecock-YT]

Anyone have any insight into the Awilco move this morning? All I can find is a Finnish tweet about a market rumor about higher UK taxes.

 

That's my guess as well, and there's no guarantee that the tax passes. O&G companies are lobbying hard to fight it. Hopefully price stays low so we can re-invest the dividends.

 

Do you have your broker automatically reinvest dividends from this?  How does that work on more illiquid stocks?  Thanks.

 

I don't, sorry.

[LongTerm]

I thought Awilco will fall once this funds managed by QVT start selling. I am so disappointed that there was no drop in the price at all  >:( 

 

anybody has insights into why there is no drop in price at all despite selling off so many shares from this QVT fund?

 

Well, here you go. You've got your wish. Are you buying?

 

Personally not sure that this selloff is totally the impact of the potential UK tax hike. Maybe some of the QVT shares were sold to intermediaries? Heilko, what's your source that the block was sold to individual investors on Nov. 28?

[siddharth18]

I'd like to know what everyone's thoughts are on the potential impact in case the tax-hike passes. I have no idea how to put a probability on this passing so I'm just going to assume that it will pass, but that it won't be retroactive.

 

Here's how I look at this: Before the tax hike fears, the market price per share was around $21-$22 and after the fears, it hit a low of $19.55. But, the intrinsic value of Awilco wasn't $21-22 to begin with. If we're going to take a haircut of 10%-15% off the intrinsic value, it still isn't close to $20. Right now the market is already assuming the worst (with respect to the tax hike) and the buyer at this price won't have much to lose in case the tax hike passes, but will have much to gain if it doesn't

 

Thoughts?

[DTEJD1997]

Hey all:

 

Here we go!  The government is not getting enough tax money, they need MORE!

 

Just goes to show that very few jurisdictions are "safe" from negative government interference (taxes, regulations, environmental, re-rating contracts, etc).  I think 1st world locations risk level is going to go UP in the future.

 

So just how much riskier are 3rd world locations vs. "safe" locations?  Obviously 3rd world locations are more risky, but I would argue the difference is smaller than most people perceive it to be.

[Olmsted]

Some quick calculations based on last quarter alone: let's say the tax rate jumps to 20% from its current ~7.5%.  Instead of paying $3m in taxes, they would pay about $8m.  Which leaves $5m less to pay as a dividend.  So your dividend goes from $1.1 to $.935.  A 15% reduction.

 

Given that we are (1) unsure that the new tax regime will ever take effect, and (2) if they do, it will not be until 2015, in my opinion the selloff has probably priced this in adequately, if not overdone it a bit.

 

I emailed IR to see if they have any estimates of what the new rate might be.  20% was just an arbitrary number that sounded about right.

[siddharth18]

Some quick calculations based on last quarter alone: let's say the tax rate jumps to 20% from its current ~7.5%.  Instead of paying $3m in taxes, they would pay about $8m.  Which leaves $5m less to pay as a dividend.  So your dividend goes from $1.1 to $.935.  A 15% reduction.

 

Given that we are (1) unsure that the new tax regime will ever take effect, and (2) if they do, it will not be until 2015, in my opinion the selloff has probably priced this in adequately, if not overdone it a bit.

 

I emailed IR to see if they have any estimates of what the new rate might be.  20% was just an arbitrary number that sounded about right.

 

Echoes my thoughts as well Olmsted.

 

Goes to show you how fickle the stock holders are and what their overall conviction is. Every time the weak hands sell off into the strong hands (for a stock I own) - I like!

[bz1516]

I’ve been quite bullish on AWLCF, having taken a position in June. However like any investment, things change. That is of course true in the case of AWLCF. It has from the very beginning been a source of consternation to some. How can a company pay a distribution of almost 25% and be safe? Maybe its not so safe and maybe we are missing something, has been a common reaction, yet nowhere in print has a reason been advanced that explains why its not safe, except for the obvious 2 rigs. But that never seemed to me to account for such an unusually high yield. The passage of time has seemed to bless the relationship between the high distribution and the price of the stock.

 

What we do know is that one Norwegian brokerage firm went from a buy to a sell. Few investors here including me have access to the number of Norwegian firms that follow the company. What they are saying about the company is a black box to most.

 

Fundamentally this is a very sound company. It has a management that is very careful and deliberate. Their integrity is very high. So this is not about the company. It is about market perception and the lack of sell side research in the US. In cases like this the buy side is on their own.

 

There have been several developments that have occurred since many of the current US holders first took a position.

 

Starting with the most recent. There has been an idea floated in the UK that there should be a tax increase on companies in the oil and gas industry that would include companies like AWLCF. Not sure how much of that has been discounted and how much has bounced back, but in the end it seems likely it won’t happen. Just because, when you’re running short of oil and gas in your own backyard, the remedy is not to increase the cost of capital to those who can at least slow down the trend.

 

Secondly there has been a recent decline in deepwater rig utilization and rates, with SDRL reporting decreases in both. Market rates are now reported to be below $500,000 from $550,000 previously. This followed a prior report by SDRL that they had leased a rig for a one well stint rather than long term, an early signal of market weakness. That followed on the heels of the Transocean report of the general market weakness they were experiencing.

 

The first question one might ask is what does this have to do with AWLCF? Their rigs are both leased through 2016. The first thing that will happen with a weak deepwater market is that deepwater rigs will find a way back to mid depth. While this does not impact AWLCF’s current rigs, it sharply reduces their opportunity to bring on any additional rigs. Even one additional rig could have added significant dividend safety and stability, not to mention a substantial increase in eqarnings. Now that possibility is gone. That was an embedded free option in the price of AWLCF that is no longer there.

 

Finally the market, in the US at least and the US has a significant share of the trading volume, seems to expect AWLCF to be producing about or almost $1.00/share each quarter through 2016. However this is not the case. Looking at all the statements the company has made publicly it is clear that capex will be subtracted from the distributions. These are not dividends paid from net income. The market doesn’t seem to realize this. Nor does the market here in the US fully understand that each rig will not be earning its day rate for a period of ~60 days during the SPS in the first half of 2016 and in fact the first rig may begin the SPS as early as December 2015 and overlap into Jan 2016.

 

My forecasts for their distribution are: 2014 - $3.40, 2015 - $2.96, 2016 - $2.25, and 2017 - $4.40. The 2017 forecast assumes current rates hold. The granularity of the analysis is based on annual rates, though I did look at each quarter for 2014. The dist. estimates for each year are +/- $0.25. The numbers are based on capex requirements for each year over the next 3 years and the guidance given by the company.

 

I don’t know what stock price discounts these new estimates? I do believe though the market in the US is expecting numbers a lot higher than these.

 

[17thstcapital]

I’ve been quite bullish on AWLCF, having taken a position in June. However like any investment, things change. That is of course true in the case of AWLCF. It has from the very beginning been a source of consternation to some. How can a company pay a distribution of almost 25% and be safe? Maybe its not so safe and maybe we are missing something, has been a common reaction, yet nowhere in print has a reason been advanced that explains why its not safe, except for the obvious 2 rigs. But that never seemed to me to account for such an unusually high yield. The passage of time has seemed to bless the relationship between the high distribution and the price of the stock.

 

What we do know is that one Norwegian brokerage firm went from a buy to a sell. Few investors here including me have access to the number of Norwegian firms that follow the company. What they are saying about the company is a black box to most.

 

Fundamentally this is a very sound company. It has a management that is very careful and deliberate. Their integrity is very high. So this is not about the company. It is about market perception and the lack of sell side research in the US. In cases like this the buy side is on their own.

 

There have been several developments that have occurred since many of the current US holders first took a position.

 

Starting with the most recent. There has been an idea floated in the UK that there should be a tax increase on companies in the oil and gas industry that would include companies like AWLCF. Not sure how much of that has been discounted and how much has bounced back, but in the end it seems likely it won’t happen. Just because, when you’re running short of oil and gas in your own backyard, the remedy is not to increase the cost of capital to those who can at least slow down the trend.

 

Secondly there has been a recent decline in deepwater rig utilization and rates, with SDRL reporting decreases in both. Market rates are now reported to be below $500,000 from $550,000 previously. This followed a prior report by SDRL that they had leased a rig for a one well stint rather than long term, an early signal of market weakness. That followed on the heels of the Transocean report of the general market weakness they were experiencing.

 

The first question one might ask is what does this have to do with AWLCF? Their rigs are both leased through 2016. The first thing that will happen with a weak deepwater market is that deepwater rigs will find a way back to mid depth. While this does not impact AWLCF’s current rigs, it sharply reduces their opportunity to bring on any additional rigs. Even one additional rig could have added significant dividend safety and stability, not to mention a substantial increase in eqarnings. Now that possibility is gone. That was an embedded free option in the price of AWLCF that is no longer there.

 

Finally the market, in the US at least and the US has a significant share of the trading volume, seems to expect AWLCF to be producing about or almost $1.00/share each quarter through 2016. However this is not the case. Looking at all the statements the company has made publicly it is clear that capex will be subtracted from the distributions. These are not dividends paid from net income. The market doesn’t seem to realize this. Nor does the market here in the US fully understand that each rig will not be earning its day rate for a period of ~60 days during the SPS in the first half of 2016 and in fact the first rig may begin the SPS as early as December 2015 and overlap into Jan 2016.

 

My forecasts for their distribution are: 2014 - $3.40, 2015 - $2.96, 2016 - $2.25, and 2017 - $4.40. The 2017 forecast assumes current rates hold. The granularity of the analysis is based on annual rates, though I did look at each quarter for 2014. The dist. estimates for each year are +/- $0.25. The numbers are based on capex requirements for each year over the next 3 years and the guidance given by the company.

 

I don’t know what stock price discounts these new estimates? I do believe though the market in the US is expecting numbers a lot higher than these.

 

Thanks for sharing - all good points. 

 

You've spend a lot of time on distributions - any thoughts on valuation?  Is the valuation out of hand given what we know now - even if you assume distribution was cut to say zero?  I certainly don't make a habit of making investments based solely on distributions/dividends with a disregard for valuation. 

[bz1516]

"You've spend a lot of time on distributions - any thoughts on valuation?  Is the valuation out of hand given what we know now - even if you assume distribution was cut to say zero?  I certainly don't make a habit of making investments based solely on distributions/dividends with a disregard for valuation."

 

This is a stock that seeks to pay out all of their FCF after capex and a strategic reserve, so dividends are pretty much the entire return.  Barring an unusual opportunity, which current market conditions have rendered less likely at least for now, there are few opportunities for appreciation except for increases in day rates.

 

I really don't think I have much to add to valuing the income stream, except to say the market in the US which is substantial doesn't seem to be aware of the reduced distributions over the next three years.

[17thstcapital]

 

I really don't think I have much to add to valuing the income stream, except to say the market in the US which is substantial doesn't seem to be aware of the reduced distributions over the next three years.

 

You don't want to value the income stream but haven an opinion on the stock price - interesting.....

[bz1516]

The purpose of the post was to bring information on fundamentals to the board which is different than many in the market expect.  I didn't express an opinion on the stock price in either post.

[Packer16]

I think the market price reflect more of your expectations.  Given that a normal yield would probably be in the low teens (6.7% return of capital (15 year life) and 6% return on capital) call it 13%, the implied distribution with today's prices is $2.60 ($20 *13%).  BTW a comp that is in worse shape thane Awilco (Northern Offshore) has a dividend yield of 13% also.

 

This is below your average expected range.  If we assume a $4 dividend we get $31.  If we use your average rate we get a value of around $25.  Also, using a 7x multiple of EBITDA (a discount from the comp average of 8x) results in a value in the low $30s.  From my calcs, I can still get to over $4.00 distribution with expected cap-ex.  Our Norwegian analysts friends also project on average $4.38 free cash flow over the next 2 years 2014/2015.

 

Packer