Tim Eriksen Awilco Drilling Presentation: Value Investing Congress Las Vegas ~ market folly

Monday, April 7, 2014

Tim Eriksen Awilco Drilling Presentation: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Tim Eriksen from Eriksen Capital Management who pitched a long of Awilco Drilling.

Tim Eriksen's Value Investing Congress Presentation

• Eriksen looks for FCF, high margins, strong management, and a near term catalyst –  adopted from Mario Gabelli

• Other interesting situations such as forced sales, spin offs, unlisted stocks – where   big investors don’t invest in.

• Briefly spoke to how Warren invested in smaller cap companies in the early days.

Awilco Drilling Pitch:

• Owner operator, trades at a 20% dividend yield and ~5x earnings.
• UK Owner and operator of two semi-submersible drilling units.
• Owners were originally got out in the peak during 08 and returned to the business got in FY10 when they bought two rigs from Transocean, whom was a forced seller. 
• Awilco trades OTC and OSLO. 
• Transocean tried to sell the two rigs in 08, but the deal fell through. In FY10, Awilco got the rigs for under $300MM. The original purchase price was materially higher. 
• Transocean in FY07 carried the rigs at ~$600MM, Awilco paid a third of the price!!
• One rig was upgraded, and spent $94MM to pay for the upgrades financed from a private placement. In FY13 the Company started trading OTC. 
• In May paid first dividend of $1 per share. Just issued bonds $125MM for ~7%.
• Are they paying out all cash? No, there are some non-cash expenses so they are paying under actual cash flow.
• Went from ST contracts in 2012 – wasn’t great. Able to get longer term deals and higher contract rates. Rates went from 250k a day to 350k per day. $60MM in rev,   $20MM op profit per quarter. 
• Willphoenix -3rd gen rig. Willhunter – built in 1983, upgraded twice. 3rd gen rigs primarily mid-water semisubmersibles.
• Today only deep-water and ultra-deepwater rigs are being produced – only 10 mid water made in the past 10 years (could be 20).
• Rigs were built in the 1980s. All mid-water rigs built in the 70s and 80s. So not   unusual – and have been upgraded. 
• Need to go under special surveys every 5-6 years, so there is some downtime. 
• Think it is a 15 year rig life, but with technology and upgrades who knows.
• UK market has 17 rigs. Not easy to move from one location to another – significant costs. Higher restrictions to enter UK market. Some sources say $100MM to move rig   from gulf to UK.
• UK market near 100% utilization. In 08-09 bottom rates got down in $250k - $350k.   At $250k – still make 50 cents earnings per quarter.
• Astute management sold at the peak, bought at the bottom. A dip would be good would allow them to possibly buy rigs for cheap again.
• Transocean idles rigs to keep market pricing strong – creates some stability for the market. 
• Most rigs in the UK market are 2nd and 3rd gen -Rates are lower for 2nd gen vs. 3rd gen – great way to get a feel of what could happen 15 to 20 years out.
• Clear picture of revenue- Awilco has contracts high quality clients and a $700mm backlog
• 30mm shares outstanding management owns ~ 48%.
• Risks – contracts terminated? Not easy to do/low likelyhood
• Commodity risk.
• Supply and demand could change – low 2nd gen would probably fall off first. 
• Material risk- if one rig breaks down would hurt revenues. Then of course, operating   breakdown, regulatory risks. Carry insurance 
• Diamond offshore (DO), Ensco (ESV) comps, all are different no apples to apples comp.
• $21.7 price, $600mm market cap, and a 20% yield locked in for three years, 60%   of capital will be returned to shareholders. Confident that the stock won’t be down   over 3 years. Not a cigar butt but a cigar. 20 year life at least.
• Big part of thesis is current yield –partially due to no taxes – where they are domiciled.

Be sure to check out the rest of the Value Investing Congress presentations.

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