Awilco Drilling Terminates Newbuild Contract And May Find Itself In A Lengthy Court Battle

Summary

• Awilco Drilling announces its decision to terminate the contract for its first newbuild rig.
• The shipyard opposes the move and states that it is considering legal options.
• If the dispute goes to court, Awilco will not see any money anytime soon even if it had the legal reasons to terminate the contract.

There’s a new twist in Awilco Drilling’s (OTC:AWLCF) story: the company decided to terminate the contract for its first newbuild rig. The official announcement is short, so I will quote it almost in full:

“Awilco Rig 1 Pte. Ltd. (“AR1”), a wholly owned subsidiary of Awilco Drilling PLC (“Awilco Drilling”), has notified Keppel FELS Limited (“KFELS”) that is has exercised its contractual termination right under a newbuilding contract between KFELS and AR1 for the construction of a semi-submersible drilling rig, Nordic Winter, as a result of breaches under the Vessel Construction Contract. The vessel construction contract provides that on termination AR1 will be entitled to a refund of the instalments paid to KFELS of USD 54,720,985 plus accrued interest”.

This is a major development for Awilco Drilling which did not have the funds to finance the second installment and which was searching for funding alternatives. Here’s a slide on the company’s thoughts about financing the construction of the rig from the first-quarter presentation:

Source: Awilco Drilling

Apparently, the company came to the conclusion that raising capital in the current environment was not a viable alternative and found that KFELS breached the contract, providing an opportunity to get rid of the rig and get its money back.

In the same presentation, Awilco stated the following: “Slow progress on Nordic Winter in Singapore the last month due to governmental Covid-19 restrictions”.

Awilco’s press release did not specify what breaches were made by KFELS. The main question for investors and traders in this case is whether these breaches were due to coronavirus-related delays in construction, since KFELS may try to defend its position in court. In fact, it looks like KFELS will choose this route. Here’s the announcement from the shipyard:

“Keppel FELS denies the allegations by Awilco in the Notice and has rejected the purported termination of the contract. Keppel FELS is currently considering its legal options and evaluating potential financial impact in consultation with its advisors. Keppel FELS has further reserved all it rights under the contract, including the right to retain the instalments already received and to seek compensation for the work done to date in the event that Awilco defaults in the payment of the 9 June instalment”.

If we were to assume that Awilco had a valid reason to terminate the contract, the situation has materially improved for the company as it will not need a cash infusion in the near term. Instead, it could use the funds it paid for the first installment on the first rig to finance the second rig, Nordic Spring. This rig is set to be delivered on March 2022, which should provide enough time to secure a contract and raise capital to finance the delivery of this rig.

However, the situation is looking like a setup for a court battle between Awilco and KFELS.

There’s a fresh example on this topic. Back in October 2015, at the beginning of the previous offshore drilling crisis, Pacific Drilling (PACD) rescinded the construction contract for drillship Pacific Zonda. The stated reason was “failure by Samsung Heavy Industries to timely deliver a vessel that substantially meets the criteria required for completion of the vessel in accordance with the construction contract and its specifications”.

The real reason behind the move was, of course, the offshore drilling downturn which deprived Pacific Zonda of near-to-medium term contract prospects. So, the key intrigue was whether Pacific Drilling had the legal reasons to walk away from the contract. As it turned out this year, the company did not have such reasons, and Pacific Drilling lost the arbitration.

I’m not a legal expert and there’s not enough information in the public space anyway, but I’d like to point out that the court battle between Pacific Zonda and Samsung Heavy Industries took more than four years.

Conclusion: Awilco is in a very difficult situation since it has no funds to pay for the second installment on the first newbuild rig while the current market environment does not provide opportunities to raise capital as planned earlier. In this situation, Awilco tried to terminate the contract, but the shipyard does not support this move (that’s not surprising). Whoever wins in the court battle, the process will likely take a lot of time as highlighted by the above-mentioned case of Pacific Zonda. In current circumstances, Awilco’s shares remain very speculative.

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