Awilco Drilling (OTCPK:AWLCF) has just reported its first quarter results. The company presents an interesting case in the offshore drilling space as the majority of its value lies in two newbuild orders set to be delivered in March 2021 and March 2022. This fact has mostly protected the company’s shares from downside that was recently seen in many offshore drilling shares. So, how is the company doing financially?
Awilco has reported revenues of $9.1 million and a net loss of $2.4 million. The company has only one working rig, the semi-sub WilPhoenix, while semi-sub WilHunter remains cold stacked and two newbuild semi-subs are under construction. WilPhoenix showed great operating performance with 100% uptime but bad weather during the quarter made the rig wait out poor conditions and led to revenue efficiency of 85.6%.
Shell (RDS.A) (NYSE:RDS.B) has recently exercised two options, and WilPhoenix is expected to work until late Q1 2020. The contract has remaining options for 2 abandonment wells and 3 exploration wells. While the company records an accounting loss, it has positive operating cash flow, so keeping WilPhoenix busy until the first newbuild rig is delivered is an important task for Awilco.
In the report, Awilco stated that the company’s Norwegian office will be established by Q4 2019. As the first newbuild will be delivered in March 2021, Awilco will have plenty of time to find employment for the first newbuild. While many offshore drilling stocks suffered material setbacks in recent days, the fundamental picture for the industry, and especially for the Norwegian North Sea, has not changed. I believe that dayrates for modern rigs in this sector will stay at or above $300,000 for 2020 and have the potential for further upside. Active supply looks tight. In addition, customers will continue to show a clear preference for modern, more efficient equipment.
Source: Awilco Drilling presentation
Currently, Awilco Drilling trades at a market cap of about $195 million. At the end of the first quarter, the company had $43 million of cash. Also, $85 million has been invested as two first installment payment for both newbuilds. The two rigs, WilPhoenix and WilHunter, have a value of about $40 million according to Bassoe Offshore. Also, the company has about $26 million of backlog with Shell. Thus, the market is giving Awilco a premium over assets of just about $20 million for the newbuild order at attractive prices and terms and the ability to order two more newbuilds at the same attractive prices.
This is a very modest valuation provided by the market, and I believe that Awilco is interesting for those willing to wait until 2021. For investors and traders with shorter time frames, the practical problem is that the company may lack internal catalysts this year – there’s no sense to hurry and find a contract for the newbuild in 2021 in a situation when rates are unlikely to fall and have a good chance to show upside in the next decade. In such conditions, oil prices, general market interest in offshore drillers and outlook for the Norwegian North Sea market will play the leading role in Awilco’s day-to-day share price moves in the near term.
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