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Summary

  • For a value investor always running after some impressive returns while going fishing, Awilco Drilling Plc. Seems an unfamiliar opportunity.
  • Comparing this tiny offshore company with the giant Seadrill Ltd. Has an almost strange biblical resonance; the story of David against Goliath all over again?
  • Risks are always present in this fluctuating market, especially when we have reached the extreme. However, it is perhaps a unique profitable investment for the next two years.

The David perspective...

Awilco Drilling Plc. (OTCPK:AWLCF) versus Seadrill Ltd. (NYSE:SDRL)

The WilHunter from Awilco website.

Awilco Drilling Ltd. Was incorporated in December 2009 when the company acquired two semi-submersible drilling rigs, WilPhoenix (previously Arctic II) and WilHunter (previously Arctic IV).

The company is registered in England and Wales with its operation based in Aberdeen, Scotland. The Company registered again to a public company on 14 April 2011, under the name Awilco Drilling plc.

The Awilhelmsen Group is the largest shareholder controlling 48.7% of the shares. Awilco Drilling Plc. Has management agreements in place with Awilco AS (and related companies) for ad-hoc support services.

Q1 2014 Presentation Oslo, May 14, 2014.

Fleet analysis.

1 - Nature:

Awilco Drilling plc. Owns 2 semi-submersible drilling rigs, the WilPhoenix and the WilHunter. (Click name for specifications.)

Both rigs were acquired from Transocean Ltd. (NYSE:RIG) around the end of 2009 (Arctic II and Arctic IV.)

After the purchase was made the company sent the two semi-submersibles to a shipyard in Gdansk, Poland, to be overhauled and upgraded for the North Sea harsh-environment milieu. The two rigs were successfully upgraded in May of 2011, and returned to their North Sea location after being re-certified.

2 - Fleet contract status:

As we can see below the two rigs are fully booked. The only slight uncertainty is for the WilPhoenix between mid-July 2014 to November 2014 when the rig will be going from Premier oil to Apache. Awilco is indicating that Premier oil may extend its contract until November 2014.

#NameYear builtContract StartContract End

Firm

Or

Option

Day rate K$

Client

1WilHunter1983/2011

5/14

6/14

Shipyard

2/16

6/14

11/15

11/15

Max 275 D

F

F

-

O

360

385

-

385(?)

Hess
2WilPhoenix1982/2011

5/14

5/14

Mid-July/14

11/14

Shipyard

4/16

2H2017

5/14

Mid-July/14

11/14

2/16

4/16

2H2017

27 months

F

F

O

F

-

F

O

322

442.5

442.5/387.5(?)

387.5

-

387.5

387.5

Premier Oil

Apache

3 - Fleet financial snapshot.

  1. Awilco has an actual total backlog of $707 million at the end of Q1 2014 and $680 million as of May 12,2014.
  2. Long-term fundamental in the North Sea market still solid. Rigs utilization in the North Sea is 87.2% actually and strong.
  3. Crude oil price is staying high and above $100.
  4. Big oil operators are committed to develop further throughout North Sea.
  5. UK Market is difficult to enter thus limiting competition.
  6. Softness of the market will not last over 2015.
  7. Contract revenues present a clear visibility. Rigs contracted in North Sea is very high at 94.4% per Rigzone.

4 - Operational performance.

Operational performance in Q1 2014 was 99.4% with some waiting-on-weather time lost due to harsh weather conditions. Operating expense OPEX per rig was $80.1K lower than expected.

This number is pretty low compared to ORIG that I have studied recently, which indicated $200k per day on average for its new fleet for 2014.

Q1 2014 Balance sheet in a nutshell.

- Total revenue for Q1 2014 was $62.747 million or 17.6% above Q1 2013. Ebitda $44.1 million. Earnings were $1.15/share.

- Cash and cash equivalent for Q1 2014 were $45.18 million.

- The total current portion of the long-term debt was $95.348 million.

Initially, Awilco entered into a financial agreement with Transocean Ltd. When it purchased the two rigs. The agreement was for a 5-year loan of $165 million at 9% with a quarterly interest payment of $2.8 million and a balloon payment of $87 million by 1/15.

The debt has been refinanced recently with their bond issue at a lower interest, and the balloon payment to RIG was paid off.

- Awilco announced a $1.15 dividend for the Q1 2014.

Here what it is said about the dividend:

Future quarterly dividend payments will be in line with the Company's intent of distributing all free cash flow above a robust cash buffer to support operational working capital requirements and planned capital expenditure.

It is the fourth consecutive dividend that the company has been serving since Q2 2013.

PeriodQ2 2013Q3 2013Q4 2013Q1 2014
Dividend $1.101.101.101.15

Awilco stock chart from Stockcharts.com starting on May 1st, 2013.

Today, May 19, 2014 is the ex-dividend day, which explain the today's down side.

Conclusion and recommendation.

I have scratched my head for a long time while trying to find anything negative to write regarding Awilco. As you can see the company cannot be in better shape. Strong balance sheet, strong backlog, clear visibility and low P/E ratio.

Of course, Seadrill Ltd. And Awilco cannot really be compared, and few warnings are flashing when we look deeper into the stock.

1 - Awilco is traded in the OTC Pink sheet with a limited market that can be illiquid and uncertain. I find that a possible problem down the road.

2 - The company owns only two rigs and if something drastic happens to one of them, Awilco may crumble like a house of cards, even if the stock seems undervalued right now. (North Sea weather can create some delays and accident is always a risk.)

3 - The rigs are not young and despite the work done in 2011. They will have a limited life and eventually will generate some extra-operating expense.

Despite some obvious risks compared to Seadrill, which is the modern Goliath that I own as my number-one holding for years, Awilco attractiveness cannot be ignored and seems a certain BUY for few years.

My advice is to buy the stock with a small amount of cash for the next two years. David will certainly not kill Goliath this time again; however, both can co-exist peacefully now for our profit.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: If You Think Seadrill Ltd. 11% Dividends Are Too High, Then Let's Talk About Awilco Drilling Plc. And Its Whopping 21%