Awilco Drilling shares have recently suffered a rapid decline following the decision to suspend the dividend, which was announced in the second-quarter report. Since then, the stock has recovered some ground, supported by increasing oil prices. Let’s look at the situation in more detail.

Having paid the outstanding long-term debt in May, Awilco finished the second quarter with $76 million of cash and zero debt. However, the necessity to finance the newbuild rig (or rigs, if the company chooses so) led to dividend suspension. One cannot say that this is a surprising decision. Awilco previously stated that it was looking at its dividend policy. Frankly, following the decision to order a newbuild, the dividend’s days were numbered. The market reaction to the dividend suspension is not surprising, but I doubt that the decision will be able to put much pressure on Awilco shares in the longer term.

The reason for this is that Awilco is now basically an option on the Norwegian market recovery, which is well underway. The company has already ordered one newbuild for $425 million (the total cost to get the rig working is estimated at $455 million) at very attractive payment terms: 10% down payment, 10% in 2 years and 80% at delivery, with an option to delay this delivery by one year. In essence, Awilco’s market capitalization at this time depends on what the market views as the true value of the newbuild order and the options to order three more newbuilds rather than on the value of its rigs or the current backlog.

Let’s look at the numbers. Currently, Awilco’s market capitalization is about $250 million. As mentioned above, the cash position is $76 million with no debt. The backlog on the upcoming contract with Shell is $44 million. The dayrate is $116,000, while costs for the rig have been reported in $80,000 whereabouts. With this in mind, the value of the backlog is roughly $13 million. Currently, Bassoe Offshore estimates that the value of Awilco’s fleet is $16 million - $26 million, but I’d expect that the valuation will go back up to $40 million once WilPhoenix returns to work and its status changes from hot stacked to drilling.

Comparing the assets that the company currently has and its market capitalization, we see that the market assigns approximately $120 million of value to the deal with the yard. With dayrates in Norway having moved to the north since the deal was announced, it does not look like a crazy premium. Speaking on the newbuild during the conference call, the company stated: “[…] we have received a lot of interest and it’s a very positive feedback on our rig offering thus far”.

In the short term, I’d expect the shares to mostly follow the oil price fluctuations. However, in the longer-term, Awilco shares could have upside due to continued strength of the Norwegian segment of the offshore drilling market and the company’s great deal with the yard. Although it’s too early to talk about this, I would not rule out Awilco being purchased by a bigger player just to get the rigs suited for the hottest segment of the market right now. However, I’d say that it will most likely take quite some time for the upside thesis to play out from current levels (absent a major improvement in oil prices) because some positive expectations have been already baked in the company’s share price.