Author Topic: AWLCF - Awilco Drilling  (Read 210076 times)

DTEJD1997

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AWLCF - Awilco Drilling
« on: May 06, 2013, 08:01:43 PM »
Hey all:

Does anybody follow or have any opinion on Awilco Drilling?

I think this is a rather interesting situation.   YOu have to be a little careful though as it is a small cap and only has two rigs.  There are other risks too of course.

It boils down to this...They are generating a TREMENDOUS amount of free cash flow.  After generating an adequate cash reserve, they are going to dividend out the majority of their cash flow.  They are almost at this level, and dividends should start up this year, perhaps as soon as next quarter.

There are lots of caveats here, but it is speculated that the dividend yield could potentially be 20% or so.  If that is correct, I am going to guess that the stock will trade a bit higher than what it currently is at. 

So you could be looking at rather substantial income AND a nice capital gain.

Any thoughts?
« Last Edit: May 07, 2013, 11:26:35 AM by Parsad »


Radio Free Cash Flow

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Re: Awilco Drilling (AWLCF)
« Reply #1 on: May 07, 2013, 08:58:27 AM »
Awilco is a huge opportunity. My post on the company is here: http://otcadventures.com/?p=708

We do seem to look at the same stuff!

matts

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Re: AWLCF - Awilco Drilling
« Reply #2 on: May 07, 2013, 12:37:37 PM »
How do you guys get comfortable with the (non) diversification risk?

One storm/mechanical problem and this stock can be cut in half, no? There are always risks, but this one seems very risky; almost like an option. Do you just mitigate that with a small position size?

Would appreciate your thoughts.
 

ItsAValueTrap

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Re: AWLCF - Awilco Drilling
« Reply #3 on: May 07, 2013, 12:55:34 PM »
Historically, the big risks for oil drillers are:

1- Fluctuations in rig rates.  For example, the spinoff stock Seahawk Drilling went bankrupt due to low rates.

2- Disasters like Deepwater Horizon can affect rig rates.  Because of the incident, regulations went up and it may take a lot longer to get permits to drill.  (Laws and regulations vary from country to country and from state to state of course.)

I don't know if that caused demand for some types of rigs to go down.

I believe Transocean owned the Deepwater Horizon rig and had a lot of losses associated with the incident.

3- Debt magnifies the effect of #1.

Or... just read the risk factors.  Overall I think that the tail risk is low.
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ItsAValueTrap

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Re: AWLCF - Awilco Drilling
« Reply #4 on: May 07, 2013, 01:14:18 PM »
It might be helpful to look at spot rates for their rigs:
http://www.rigzone.com/data/dayrates/

---
The last time I looked at drilling, this is what I thought about the industry.

You make money in two ways:
1- Correctly predicting future rig rates (or the price of buying/selling a rig).  Or just buy when rig rates are extremely low because they will likely go up in the future.

2- Arbitraging discrepancies in pricing.  The public markets often gets things wrong in pricing these stocks.

Atwood Oceanics looks like the only company that generated unusual returns for shareholders.  But their old CEO is gone.  I'm not exactly sure how they made their unusual returns.

Dryships/Oceanrig did a lot of #2... but way too much of shareholder money ends up in the CEO's pocket.  If you compare the market cap of these companies compared to the current market value of these rigs, then sometimes there are discrepancies.  They may also have long-term contracts that should be accounted for.

3- Overall the drilling industry may not be the greatest industry around.  It is highly cyclical.  There are periods of oversupply which causes everybody to lose a lot of money.  I don't know if the industry makes more during the booms than the busts.  The industry might be close to break-even over the whole boom/bust cycle.  During boom times, the bankers will be busy doing IPOs and secondary offerings for these companies.  That's when you want to avoid the industry.
« Last Edit: May 07, 2013, 01:19:16 PM by ItsAValueTrap »
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DTEJD1997

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Re: AWLCF - Awilco Drilling
« Reply #5 on: May 07, 2013, 09:17:14 PM »
Hey all:

Yes, there is certainly risk here, and many different flavors of it too!

HOWEVER, rates are high, and ARE GOING TO STAY HIGH for the near future, especially in the North Sea.  This could all change in a few years...but what if the cycle stays strong for another couple years after that?

There is a possibility that market rates strengthen.  Some people have been talking about "peak oil".  I am not convinced we are there, but we could be...so if that is the case, a LOT more rigs are going to have to be deployed to find the same amount of oil.  There is also growing demand for oil from the 3rd world (China I'm looking at you)!

You also could have a potential hedge against the decline of the US dollar.

This company only consists of two rigs.  So if one of them has severe problems, the company is going to have BIG problems.

Awilco could also have problems with their customers.  If one of them has problems paying the bills, Awilco is going to be in big trouble.

HOWEVER, I think a lot of those risks will be mitigated with a 20%+ dividend (possibly even a 30% dividend).  Get a couple years of dividends and a lot of risk has been removed.

Also let us assume that rates weaken in 3 years.  How far will rates weaken?  Might the dividend go from 30% to 10%?  Does the dividend have to go to zero?

These are older rigs, no doubt.  How much life is left in them?  I think that largely depends on market rates in the future.  If there is a demand, they will be used.  The terminal value of these things won't be zero. 

Also, I think there is some amount of protection here as both the rigs are working the North Sea, which is a strong demand area.

If you had a portfolio of 40 rigs dispersed across the world and held through all economic cycles, your return probably won't be that good.

If you hold a concentrated risk in a single market, you might be able to make a go of it, especially if the assets are mispriced (low) to begin with.

A good strategy might be to hold this for 12-18 months.  Collect some nice dividends and sell when the "retail" income investors come flooding in and push the price up. 

We'll see.  I think it is an interesting opportunity.

I would also highly recommend "OTC Adventures" blog.  There are many compelling opportunities that get a good & thoughtful writeup there. 

ItsAValueTrap

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Re: AWLCF - Awilco Drilling
« Reply #6 on: May 07, 2013, 09:37:03 PM »
Quote
Also, I think there is some amount of protection here as both the rigs are working the North Sea, which is a strong demand area.
Umm... these rigs are regularly moved around the world.  Many competing rigs are being moved around the world.

Secondly, I think that you need to invert.  Not every business out there is a magical fountain of money.  Not every industry out there is wonderful (airlines suck, junior mining is terrible, insurance is marginal, drilling is marginal, etc.).

As a sanity check, rank every company in an industry.  Which ones are the best managed?  Which are the worst?  If you can't figure that then you probably should stay away from the industry.  I'll just give you some hints.  The ones with the most debt are probably poorly managed.  The ones where insiders pay themselves too much are bad.
You might also rank them based on the market value of their rigs+contracts.

2- Are they actually going to pay out a 20% dividend?  I doubt it, though I could be wrong.

Management is probably going to pay out a small dividend to make investors happy.  Then they're going to raise capital anyways (if the shares are overpriced) and go crazy buying up more rigs.
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DTEJD1997

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Re: AWLCF - Awilco Drilling
« Reply #7 on: May 08, 2013, 08:51:03 AM »
The rigs can be moved?

Yes, but it can take several months and many millions of dollars.  Moving these things from one region to another is not a light undertaking.

Not every business is a magical fountain of money?

What?  Are you sure about that?  That isn't what my broker told me!

This company has only been public for a few years, and the rigs have only been deployed for a bit shorter a time frame than that.  They have contracted rates to established companies.  Assuming the contracts hold, it is fairly easy to see how much money this company will make.  Not a sure thing, but reasonably certain for the next 18 months or so...

They have signed contracts for both their rigs for the next 13 months.  One rig is contracted until November 2015 and the other until May 2014.  Both of them have renewal options.  Capacity in the North Sea looks tight well into 2015.

In the 4th quarter of 2012, they earned $.76/share.  Multiply that by 4 and you are over $3/share.    There is a strong chance that upcoming 12 months earnings could be somewhat higher than that for a variety of reasons.  So them paying $2.50/share in dividends might easily be possible.

Management has stated MANY times that they intend to pay out a vast majority of their free cash flow.  That could change if they see a rig for sale...but I am going to take management at their word.

Why would they raise capital at this point?  The shares are probably UNDERVALUED.  They have no need of capital, not now.

Sure, they could go crazy buying rigs...a million things could happen.  But if the company stays in a "steady state", this thing is going to throw off a LOT of cash.

We'll see what happens...

Hielko

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Re: AWLCF - Awilco Drilling
« Reply #8 on: May 11, 2013, 07:13:00 AM »
Started looking in this name as well.

Seems to me that earnings next year could be significnatly higher than $3/share. Whilphoenix was contracted at $290K/day from Oct till the end of Nov before the rate was raised to the current $315K/day. Wilhunter was contracted at $300K/day from Oct to mid Dec, and is currently contracted at $315K/day and this rate will increase to $360K/day in April. Not adjusting for the $3.6 million in bad debt in Q4 also seems quite pessimistic. FCF yield might be closer to 30% in 2013 than 20%.


Packer16

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Re: AWLCF - Awilco Drilling
« Reply #9 on: May 11, 2013, 07:43:24 AM »
These appear to be fixed-up older rigs.  How did you get comfortable that they will not be obsolete in 5 years and you only get your money back.  I saw on the OTC adventures website that these have a 20 year remaining life but could find no source for rationale. 

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