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.

Key Assumptions:

1. We know that Awilco is committed to distributing all cash above its reserve for major expenditures.
2. We know its rig rates.
3. 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)
13Q1	1.00	30	338	59	29
13Q2	1.00	30	338	59	29
13Q3	1.10	33	338	59	26
13Q4	1.10	33	348	61	28
14Q1	1.15	35	350	61	26
14Q2	1.15	35	364	64	29
14Q3	1.15	35	405	71	36
14Q4	1.20	36	386	67	31
15Q1	1.20	36	386	67	31
15Q2	1.20	36	386	67	31
15Q3	1.20	36	386	67	31
15Q4	0.85	26	322	56	31
16Q1	0.65	20	285	50	30
16Q2	0.40	12	202	35	23
16Q3	0.60	18	275	48	30

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)
48%	0.16	5	200	35	30
42%	0.30	9	225	39	30
35%	0.45	14	250	44	30
29%	0.59	18	275	48	30
22%	0.74	22	300	52	30
16%	0.89	27	325	57	30
9%	1.03	31	350	61	30

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%
48%	0.64	5.33	4.57	4.00
42%	1.20	10.00	8.57	7.50
35%	1.80	15.00	12.86	11.25
29%	2.36	19.67	16.86	14.75
22%	2.96	24.67	21.14	18.50
16%	3.56	29.67	25.43	22.25
9%	4.12	34.33	29.43	25.75

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.