Given the recent events surrounding Awilco, the management sale of a small stake below then current market prices, the Scottish independence scare changing North Sea capex plans, and the decline in energy prices, I wanted to revisit the impact on daily rig rates on Awilco’s dividend.
Currently, Awilco owns two rigs under contract in the North Sea at an average day rates of $386,500 through 2015. At these rates, it is able to cover all maintenance and capex and still pay an impressive $4.60/year dividend, for a 25% yield at its current $18.25 stock price.
If nothing changed, we could simply multiply the current $1.15 quarterly dividend by the 18 year remaining life of Awilco’s two rigs, discount the dividends at 10%, skip the dividend once every three years to reflect downtime for maintenance, plug the numbers into Excel and get a future dividend stream worth $35. At today’s price of $18.25, that looks like a pretty attractive proposition. Of course, drilling is a cyclical business and assuming the rig rates stay constant is about the only thing I can guarantee won’t happen.
So what happens when rig rates change? Given that most rig operating costs are fixed, changes in rig rates show a leveraged impact on profitability. To help me with this, I constructed a simple model to estimate the impact of a change in daily rates on the dividend.
- We know that Awilco is committed to distributing all cash above its reserve for major expenditures.
- We know its rig rates.
- We know how much it has paid in dividends.
|Quarter||Quarterly Dividend Per Share (USD)||Dividends Paid (millions)||Contracted Daily Rig Rate (thousands)||Quarterly Revenue (millions)||“All costs” (Revenue – dividend)|
Color code: The values in purple are my estimates, the values in orange include a month when a rig is in dry dock (Dec 2015- Jan 2016 and March 2016 – April 2016), and the values in black are either actual or calculated values.
The contracted Awilco Daily Rig Rate = the sum of both rigs contracted rate divided by two. Zero is used for rigs in dry dock undergoing maintenance.
Quarterly Revenue = Average Rig Rate * 90 days * 2 Rigs * 97% up-time
“All costs” is the catchall bucket for what it costs Awilco to pay all expenses and capex.
Lastly, there is a gap of about 45 days between when the quarter ends and the company pays the dividend.
Impact of a cut in Rig Rates on the dividend
|Rig Rate Cut||New Quarterly Dividend||Dividends Payable (millions)||Post 2016Q3 Rig Rates (thousands)||Quarterly Revenue (millions)||“All costs” (Revenue – dividend)|
How do these rates translate into dividend yields and stock prices?
|Stock price that supports the following yields|
|Rig Rate Cut||New annual dividend rate||12%||14%||16%|
I use high rates to reflect that some of the dividend is really a return of capital since the rigs will be scraped in 18 years.
Using this model, the $19.12 price (120NOK) at which the Wilhelmsen’s sold a 10% stake would imply they expect a 25% or so drop in rig rates in 2016 if they are seeking a 14% yield. Or it may just imply how hard it is to sell a large stake in an illiquid company that they had to take a discount even if they expect rates to stay the same.
For more information on rates, the Awilco site has a recent “Pareto Oil & Offshore Conference September 2014” slide with North Sea rate history.
In closing, I know this model is very simplistic, and I know it is “wrong”, but I found it a useful way to think about rates and I hope you have as well.
Disclosure: I still own AWILCO, but I am no longer interested in being overweight this stock until the bottom of the next cycle when its inherent leverage will be more likely to work in my favor.