Standard Drilling (OTC:SDSDF) has increased by 35% since the bottom in late December 2018 and by 13% since my last article on the company in February of this year. Despite the recovery, the stock is still trading at an attractive discount to book value.
Figure 1 - Source: Oslo Bors
Term Rates Recovery & Valuation Process
Term rates got down to extremely depressed levels during 2016-2017 and has since started to pick up. While the rates are still a long way from historical levels, the percentage uptick has been significant. More recently, we have seen a sharper increase.
Figure 2 - Source: Standard Drilling Q1 Presentation
The increase in term rates and positive EBITDA from the large-size PSVs likely contributed to an uptick in the valuation of the assets during the quarter. Despite the uptick in the valuation, it is important to keep in mind that the company still relies on conservative valuation. The fact that the company has consistently sold vessels above book value, confirms the conservative nature of the approach described below.
Figure 3 - Source: Q1 2019 Quarterly Report - Page 13
There were no changes to vessels during the quarter, but more interesting progress was made during the month of April. The remaining PSVs in New World Supply where Standard Drilling has a 34.4% ownership stake were sold off. The sale was once again made at a price above book value. As of Q1, the book value in New World Supply was $15.2M.
The company also acquired a large-size vessel (800 m2 deck-space) for $8.1M through a court process, named Standard Olympus. The deck capacity of Standard Olympus is smaller than the other large-size PSVs, but so was the purchase price. I view this as good acquisition when considering that the vessel was built as late as 2014.
I completely understand the company is making investments where the opportunity presents itself, but I am very pleased to see the large-size PSVs taking up a larger portion of the total fleet, as I expect them be able provide a higher margin if the recovery gets going.
The below graph looks at the fleet utilization rate, with the large-size PSVs in the first graph and mid-size PSVs in the second graph. We can see good rates in general, but especially encouraging data by the large-size vessels, both in terms of recent levels and consistency.
Figure 4 - Source: Standard Drilling Q1 Presentation
We have seen the book value increasing some in Q1 2019, compared to previous quarters. The stock price also increased significantly, but I view the current price to book of 0.80 as very attractive given the conservative book valuation.
Total equity as of Q1 2019 was $114.3M and the same is true for total assets, once more keeping in mind the conservative approach employed. Liabilities are of insignificant size, only $53,000. From $114.3M, $16.2M was in cash. We also know Standard Olympus was acquired for $8.1M and Standard Drilling's share in New World Supply now only comprises of cash, which should be above $15.2M, Q1 2019 reported book value.
Apart from conservative valuation, we also have at least 20% of the book value being held in cash which offer some downside protection.
We are starting to see a turnaround in the PSV market where Standard Drilling has no leverage, has some of the lowest costs in the market, trading at a discount to book value and recently got a more attractive vessel mix. I think Standard Drilling provides significant upside if we see terms rates continue to improve, while at the same time offer good downside protection if a depressed market continues.
Disclosure: I am/we are long SDSDF. 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.
Additional disclosure: I am long Standard Drilling on Oslo Bors.