DNB's Losing Clients
I thought I'd share latest views on things that have happened and Awilco (OTCPK:AWLCF) going forward. First off, my perspective regarding the claims the Norwegian analyst houses made. DNB issued a sell analysis. In essence, these people are in the business because they create transactions, and that's exactly what they did. Judging by the transaction statements the main sellers was DNB in the Norwegian noted stock of Awilco Drilling, essentially selling their shares cheap as people who bought would have made around 6-12 % in the short term. Nothing I would not expect. Now their superficial statement did not surprise me either, they explained that the rig market would be a bit more negative in the coming months and they see a full valuation. I am happy because A) they do not think beyond a couple of months and thus created an opportunity, B) They do not understand who runs the business nor the obvious long term perspective undervaluation case C) Dividend will increase yet again, which I will explain later.
The Best Is Yet To Come
The rig demand/supply market is not bad at all, almost all rigs are operational. I believe the short term worry has to do with something that a rig has problems getting a contract signed. Have they asked themselves which rig it is, in what condition, etc? Obviously there is a good explanation to this, not that the market will tank anytime soon, considering all the good news coming out for oil prospectors in the UKCS. Even if it is true, Awilco drilling is not affected by any short term worries, they have definite contracts signed that will deliver cash on a daily basis.
The tax issue development will be interesting to see the, but it will not change the investment case, if that's what people want to believe then fine, but remember the BOP CAPEX reduction is more or less going to compensate for that cost. I will refrain from discussing the tax issue in detail, but I think the government has no good incentive to disincentive drilling operators in an already much regulated market in the UKCS (barriers of entry). The oil and drilling operators will also have their fair share of arguments before anything is going to happen, after all, oil operators do indeed stand for a lot of development and taxes and should have a fair impact on the final resolution.
Now I do believe that the CEO of Awilco drilling will over deliver on the estimates he has set out. Judging by track record he is likely to do this again. CAPEX & Operating costs appear to be the items that will significantly deviate from expectations. Depending on the share price development, the synthetic stock option package (Part of SGA) for management might partly compensate for the over performance. But on a net basis, I anticipate a positive unknown surprise factor of 10 M.
Now you have the BOP which is non-recurring and is a great way to limit the cost in 2016 SPS yard stay. They will pay 45 M instead of 85 M which can be covered by Q4 2015 and a single operation of one of the rigs in beginning of 2016. At that point in time a year or so has passed since the Wiihunter contract has been extended, after all the rig will be to its maximum potential and a broad customer willingness will be available, unless there is a catastrophe in the economy and/or oil prices dips below satisfactory ROI levels.
So what we can look forward to? Well, from now on the 2.5 m increase I was talking about in the last article is still valid, but there was a one time item income that partly compensates for that income in Q3. So I would expect that Q4 will look like Q3 more or less. The increased cost will not be in effect by April (NICs) and then by Q3 we should see a dividend of 1.3 dollars. The extension of the premier oil contract is a good trigger for the company or so of 55k per day or around 5 M dollar for the quarter. Then there is the debt, I am sure you are aware that Awilco did in fact save some cash in the latest quarter and I expect them to gather a few million more in the coming quarters. But the main point is the refinancing, which you should not underestimate as Wilhemsen is a prominent figure within financing also. I explained the potential in the last article and the large potential in cash flow generation by debt refinancing itself.
Moreover, I was happy to see management execution in the last quarter, in fact I don't expect this operational efficiency to recur, but I wouldn't be surprised if it were to continue. But I would also like to say something about the valuation of the company that I went into more detail in the last article; the cash flow potential and valuation is not adhering to each other. By 2016 the value of the company will be around 400 M, assuming that dividend levels remain and no capital appreciation is seen. Think of it, even with a company that has one rig it would mean a significant undervaluation and it has contracts beyond 2016 for 27 months from mid 2017. I think of this as a game of chess, but it is boring in the way that you already know what the opponent will do so there is less of a challenge, not many have come to that conclusion so that is fine and I like to keep it that way, even if it is boring, it's a type of predictable investment and its been and going to be even more profitable.