market folly

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.