One of the worst performing sectors of the market this year has been the offshore oil and gas drilling sector. A combination of oversupply and falling demand, has pushed the industry into a recessionary period, which is expected to last for around two years. As a result, drilling stocks have been sold off and Seadrill Ltd (NYSE:SDRL), the largest driller by market capitalization, has seen its stock collapse 20% year-to-date.
However, as with any broad based sector sell off, opportunities have emerged from the bloodbath and in this case the opportunities come in the form of small-cap drillers, AWILCO (OTCMKTS:AWLCF) and Vantage Drilling Company (NYSEMKT:VTG).
There is a lot to cover here in a small space, so apologies if this article is rushed in places.
Opportunities in Awilco
AWILCO (OTCMKTS:AWLCF) is based in Europe and was pitched as an opportunity by Tim Eriksen, of Eriksen Capital Management at the Value Investing Congress held in Las Vegas earlier this year. Awilco Drilling owns and operates two refurbished and enhanced mid-water semi-submersible drilling units. The company’s primary listing is in Oslo but shares are also traded over the counter within the US.
As already mentioned, Awilco owns two rigs, both of which were acquired from Transocean LTD (NYSE:RIG) for a knockdown price of $300 million during 2010. Transocean was carrying the rigs on its balance sheet for $600 million but was forced to sell, hence the bargain bucket price AWILCO (OTCMKTS:AWLCF) paid.
Awilco is 48% owned by management and has a $700 million order backlog, approximately 3 years worth of revenue. For full year 2013, Awilco reported EPS of $4.07, which puts the US OTC shares on a P/E of 5.2. Cash and equivalents totaled $52 million at the end of 2013 and long term interest bearing debt stood at $87 million ($212 million inducing the bond mentioned below).
Additionally, at present levels AWILCO (OTCMKTS:AWLCF)’s dividend yield stands at 20%, which is locked in for three years based on the above backlog. As the offshore drilling industry is about to enter a cyclical downturn, Awilco has potential to build its fleet by acquiring second-hand rigs at knockdown prices. Awilco just successfully issued a $125 million secured bond with a 7% coupon maturing April 2019, implying that management are seeking growth.
Opportunities in Vantage Drilling
Next up is Vantage Drilling Company (NYSEMKT:VTG). Vantage is in trouble right now with high levels of debt but the company has plenty of potential for growth. Vantage Drilling Company (NYSEMKT:VTG)’s debt-to-EBITDA ratio was 7.8x at the end of 2013. To quickly put that into some perspective, Seadrill Ltd (NYSE:SDRL), which is considered by some to have a high level of debt, had a debt-to-EBITDA ratio of 5.4x during 2013 and the company’s gearing ratio was 180%; Vantage’s gearing ratio was closer to 450% during 2013.
Still, Vantage has one of the youngest jack-up fleets in the drilling business and the company one of only four drillers, with 100% of the jack up fleet able to drill deeper than 350 feet — deepwater in other words. But that’s not all: Vantage Drilling Company (NYSEMKT:VTG)’s UDW drillship fleet has an average age of a year, although this fleet is only comprised of four units, one of which is yet to be delivered. Nevertheless, this young fleet means Vantage’s services are likely to be in demand over the next few years as high-spec UDW units are expect to remain in demand despite the wider industry slowdown.
As these drilling units are already contracted out for a fixed rate, Vantage Drilling Company (NYSEMKT:VTG)’s management believes that during the next year, debt-to-EBITDA will drop to 5x and the resulting cash flows will cover all debt maturing before 2019. So, it would appear that Vantage’s management has everything under control and the company’s shares could be due for a re-rating over the next twelve months. At present Vantage trades at a forward earnings multiple of 5.3.