Awilco Drilling (OTCPK:AWLCF) is the world’s smallest oil driller. And by small I mean one ship. They concentrate mainly in the North Sea, one of the harshest drilling environments in the world.
Awilco used to have 2 ships, but they had to cold-stack one of them because of lack of contracts. Cold-stacking is basically mothballing a vessel and to bring it out of cold-stack would require time and money, neither of which Awilco has.
Despite this dismal situation, Awilco has contracted to build 2 new harsh climate drillships for delivery beginning in 2021.
I have written about Awilco before, my last article being “Awilco Is A Falling Knife That Could Hurt A Lot If You Try To Catch It” at which time AWLCF was selling for $3.35. As of today, Thursday, May 14, 2020, AWLCF is selling for 49 cents.
Here are 6 reasons I think Awilco Drilling is a bad investment.
1. The 2019 annual financial statements can only be called a disaster
Here is the year-end 2019 income statement. Notice the loss of more than $30 million on revenue of $38 million. The loss per share is $.57 which is 8 cents more than the current share price.
That is about as ugly a financial report as you will ever see.
2. Q1 2020 was even worse with the word ‘nil’ being applied to revenue
When your only ship is hot-stacked for the entire quarter, you are in big trouble. That means no contract work and zero revenue. Hard to believe in this pricing environment it’s going to get much better.
“Operations and Contract Status
In Q1 2020, the WilPhoenix was hot stacked in Invergordon, awaiting commencement of the Petrofac contract on 1 May 2020.
Revenue efficiency and contract utilisation were nil.
At the end of March, WilPhoenix had a total remaining contract backlog of approximately USD 13.8 million.
During Q1 2020, the WilHunter was cold stacked in Invergordon.”
3. Oil production in North Sea production down by 70% and dropping
Historically, Awilco’s drilling has been in the North Sea. The following chart comes from the UK Oil and Gas Authority. And this chart ends in February 2020, before the huge oil price crash. That means more competition and fewer available contracts.
Note that Awilco’s only current working vessel the WilPhoenix was built in 1982.
From March 2020:
“Deirdre Michie, the chief executive of OGUK, said the latest oil price collapse, “coming so soon after one of the worst downturns in our history”, has left the UK’s oil industry “in a paper-thin position”.”
“Paper-thin” doesn’t sound like a promising future business environment.
4. Current contractual work is at a minimal level
Awilco actually had the WilPhoenix in warm-stack in December and had zero revenue for the first quarter as discussed above. But Awilco now has 2 short-term contracts for 2020. One is for approximately 100 days starting in May and the other maybe 70 days starting in September 2020.
After zero revenue in the first quarter, Awilco needs to land some much bigger contracts than these two in order to stay afloat.
“With reference to our press release of 30 January 2020, Awilco Drilling PLC is pleased to confirm that a contract has been signed with Petrofac Facilities Management Limited (Petrofac) for the provision of WilPhoenix for a three well Plug & Abandonment program on Rubie and Renee. The program has an estimated duration of 100 days and will commence in early May 2020.”
“With reference to our press release of 25 February 2020, Awilco Drilling PLC is pleased to confirm that a contract has been signed with Serica Energy (UK) Limited for the provision of WilPhoenix for a one well workover on the Rhum field. The contract has an estimated duration of 70 days including preparatory works and will commence around 15 September 2020. WilPhoenix is expected to be available for future work from early December 2020.”
5. Who cares about the Barents Sea at this point?
Management is sounding desperate by bringing up potential Barents Sea capability on their two new builds. With oil prices and volumes where they are today, no one will be drilling in the Barents in the near future.
From the Q1 report:
“The Company has also ordered two new-build rigs of Moss CS60 ECO MW design equipped for drilling in harsh environments, including the Barents Sea.”
At this point, production costs (not including discovery and drilling costs) are too high for any new drilling to be contracted in the Barents Sea.
6. Awilco shareholders have been punished enough
And lastly are 2 charts showing the complete frustration of Awilco shareholders for the last 5 years. Down and down they go, where they stop nobody knows.
At this point, I find Awilco Drilling not investible. I see no legitimate way forward unless oil prices rise above $60 and stay there for a long period of time. You could try to short the stock, but volumes are low and it is probably not worth the risk and trouble.
If you want to take a chance on oil prices going up, Energy Transfer (ET) would be a much better option, “Energy Transfer LP: Best Of Breed Oil And Gas Pipeline Company“.
Risks, alarm bells and red flags
With the vagaries of oil prices, any company associated with the quote “oil market” is subject to volatile price movements as can be seen in the price chart above.
In addition, there could be a recession coming or even a depression according to several economists.
“Economic data in the near future will be not just bad, but unrecognizable,” Credit Suisse economists led by James Sweeney wrote last week. “Anomalies will be ubiquitous and old statistical relationships within economic data or between market and macro data might not always hold… There is no blueprint for the current shock, and uncertainty about the extent of contagion and the economic consequences is overwhelming.”
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.