A recent buy in my portfolio is Awilco Drilling (OSL:AWDR), which owns and contracts out two drill rigs. It has a dividend yield of 20% and a stable stream of income under contracts for the next few years. But the dividend has only just started to be paid quarterly, so it does not appear in a lot of screeners which is why it has gone unnoticed. I came across this idea initially on Alpha Vulture. This Seeking Alpha article gives more information on the company, and here is a Wikipedia page on drilling rigs for those that don’t know a lot about them.
The oil industry is priced low all-round at the moment, so there are bargains around and I feel this is one of them. Read the piece I linked in my last post for more info on why the oil market is undervalued.
A brief history
The group purchased two drilling rigs from Transocean in January 2010, Wilhunter and Wilphoenix for $221m. It was a forced sale due to regulations and in a depressed market so they got a good deal. It was purchased using equity and credit from Transocean. Importantly this also means Transocean can’t build more rigs to compete in this market.
It then had several rig upgrade projects with both rigs starting operating in July 2011. Quarterly earnings per share from then onwards were as follows:
Q3 2011: $0.50
Q4 2011: $0.48
Q1 2012: -$0.14
Q2 2012: $0.17
Q3 2012: $0.48
Q4 2012: $0.76
Q1 2013: $0.82
What happened in early 2012? Well one of its drills was down for over a month, another only started work in March. Such are the risks in the industry of contracting.
The company now
The company announced in June that WilPhoenix could be contracted for 3 years from Q3 2014, with an option to extend for another 2 years. The contract is estimated to be worth $424m, well in excess of what it paid for the rig as you can see. WilHunter is currently contracted until the end of 2015.
It has also announced a quarterly dividend of $1 per share, which should be covered with the new increased rates it is getting on the rigs. Debt is manageable at $100m (compared to Q1 earnings for $25m).
Contracts can be cancelled, as happened to WilPhoenix in 2012. Given it has only 2 rigs it would have a major impact on cash flows and the dividend if it couldn’t find a new contract. With oil prices remaining at current levels however, there will be other companies wanting to contract the rigs.
In the past, there have been prolonged periods of rig oversupply with correspondingly depressed utilization rates and dayrates largely due to earlier, speculative construction of new rigs. But most mid water rigs around where built in the 70s and 80s and few have been built since. Check out the prospectus for more info (p29).
There are also rumours that the company will purchase brand new rigs but this have been denied by the company.
The service life of the rigs to be operated by the Company will ultimately depend on their efficiency. There can be no assurance of how long the rigs will be in operation, but I have read a random comment of 8-10 years. The capital associated with the repair and maintenance of each rig increases with age.
This is a cheap security, but it does have its risks. With the current long term contracts however, I think it is undervalued so I bought a position, albeit a small one at 3.5% of my portfolio, given the risks.
I am not looking to hold this long term, as I will be subject to withholding tax of 30% on the Norwegian dividends, so I am hoping the market recognises this undervaluation soon and the price appreciates. I think I will look to get out when the dividend yield hits 10%, so up roughly 100% from current levels.
Disclosure: AWDR – long