In my previous article on Awilco (OTCPK:AWLCF) titled "Will Awilco Buy The Second Newbuild Rig?", I argued that Awilco will likely give the second newbuild option a pass as the downside in oil prices seen in the fourth quarter of 2018 put pressure on Awilco's shares, reducing the attractiveness of equity financing option.
I got this one wrong. Awilco has recently announced that it declared the second rig newbuilding option, contemplated private placement of its stock, and appointed a new CEO. Let's get through these developments one by one.
The new CEO is Jens Berge, a Norwegian citizen who has had a long career in Maersk. The change in leadership is most likely due to the necessity of building an organization in Norway, a key market for the newbuilds.
Source: Awilco presentation
The second newbuild rig comes with the same attractive terms: $425 million cost, upfront payment of 10%, the second installment of 10% in 24 months, and 80% of the cost paid at delivery. Two independent options remain.
To finance the payment of the first installment for the second newbuild rig, Awilco contemplated private placement of new shares with gross proceeds of about $20 million at a subscription price of NOK 31.80 per share ($3.66 at current exchange rate). In comparison, the previous private placement was done at a subscription price of NOK 29.00 per share. Since then, Awilco shares had material upside together with other offshore drillers and suffered a big correction in the fourth quarter of 2018, also as part of the offshore drilling stock group. As pre-subscriptions from existing shareholders amounted to more than $20 million, outsiders had no chance to participate. It looks like current big shareholders used the correction in Awilco shares as an opportunity to scoop its shares on the cheap and at the same time provide funds for the first installment payment on the second newbuild rig.
In my opinion, this development is positive for Awilco, although the private placement caused a temporary drop in the price of the company's shares. With two newbuilds on the way, the company is starting to look like a real organization in Norway. Organizational efficiency demands that a driller reaches some "critical mass" on the market, and Awilco is on the way of doing so in Norway.
Short-term price performance of Awilco stock will depend mainly on oil price fluctuations, while longer-term perspectives will depend on the company's ability to score contracts for newbuild rigs as well as dayrates in the Norwegian North Sea market. Recent fixtures in the region have been promising and more upside is likely to come in 2020 and beyond. In my opinion, Awilco maintains its potential as both a viable business (assuming that it will be able to put both newbuild rigs to work) and as a takeover target to a player willing to get newbuild rigs for the Norwegian floater market. In short, I'm optimistic on Awilco at current share price levels, although investors should keep in mind that the shares will likely remain volatile and that a proper bet on Awilco's upside requires an appropriately long timeframe for the thesis to develop.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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