Awilco Drilling and Bonheur

One of latest investments that I've made is in Awilco Drilling. I cannot recall how I found out about the company, but I am fairly certain that my thought process started with Lundaluppen's series on Bonheur. To be honest I did not understand much of it, more than that LL had done his homework. Based on a RoE of 6% the company seems fairly valued; if they can increase this a couple of %-points each year going forward, it will be a very good investment. I think my key conclusion from LL's analysis was that you buy FOE and get some other businesses for free. That seems reasonably interesting as long as the rest is not cash-draining. However, I felt that Bonheur was out of my 'circle of competence' and a very complicated structure of companies I just had a hard time to understand. As I started to do some digging on my own I found out about Awilco Drilling. Doing a comparison between Awilco Drilling, FOE, Seadrill, Transocean and Diamond Offshore on multiples I found that Awilco was much cheaper than the rest with FOE as a distant number two on most parameters.

The really interesting part with Awilco is that they are really showing me the money as a stockholder. My first investments have already returned 11,5% cash back in less than five months. However, there is at least one major issue from a risk perspective in the short term; they only have two rigs. Bad things can happen. Therefore I have taken two precautions; firstly I have only invested a smaller part of my portfolio into the stock (<5%), secondly, as I would further like to mitigate the impact of something happening to one of the rigs (while still surpassing the 5% level) I created a 'hedge' by expanding the number of rigs by buying also Bonheur (which owns the more expensive FOE, but also hold some other businesses). So I partially view Awilco (~67% of combined purchase value) and Bonheur (~33%) as 'one' investment at the time being, in the sense that the combined businesses in the short term should be able to generate a cash flow of at least >2% of initial investment even if one of the companies run into severe trouble.

The key point with this post kids, is that you should really think about the risk in each investment. If there is a significant risk, make sure the stake you take is a small part (I would say <5%) of your total asset portfolio. Never risk your well-being for the long run by doing something risky in the short-term. It really kills your long-term investment performance.

40percent2years - Possible or not?

Investing for stable stock dividends now and in the future is my main way of creating the positive cash flow that we are going to live off. The blogger 40percent20years is setting a very good and clear long-term goal for his investments (40% dividend yield 20 years after your investment).

So could there be cases where you could be 10 times faster reaching a 40% dividend yield, i.e. to reach it in two years time? Yes, matter of a fact I found out about one case fairly recently!

In the period between March 21st and August 20th 2012 (i.e. during 5 full months) it was possible to buy Awilco Drilling for 53,5 NOK or lower (however most of the time between 46-51 NOK). Total value of stock transactions during this period was over 190 MNOK, however most of this I do not think traded between normal small investors. My understanding is however that at least 23 MNOK did, so it would have been possible to take a significant stake in this company. At this time the company did not pay dividends, but clearly stated the following in its full year 2011 report: "During the course of 2012 Awilco Drilling is scheduled to repay debt to Transocean amounting to approx. USD 46 million. The scheduled debt repayment in 2013 is USD 11 million. This significant decrease in debt repayment will enable a return to investors of a major part of the company’s free cash flow generated in 2013 and beyond. The level of dividend will reflect the underlying financial position of the company, while taking account of opportunities for further value creation through profitable investments. The dividend will normally be distributed on a quarterly basis with expected commencement sometime during the first half of 2013."

The first quarterly dividend was paid on June 20th 2013 and after that quarterly. The first four dividends amounted to 24,9144 NOK, corresponding to a yield of 46,5% on a price of 53,5 NOK. Buying the stock at 49,5 NOK would have yielded 50%... So new target should be 50%2years. ;-). The company also just paid out its fifth dividend, which was the highest so far at 6,8909 NOK.

NB: Closing stock price today June 24th is 145,5 NOK. I have a position in the stock (started much later unfortunately)