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Bullish Developments Continue For Ocean Rig

Faisal Humayun

Faisal Humayun

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Ocean Rig (ORIG) has surged by 7.1% in June 2014 backed by few positive events during the month. This article discusses the near-term stock catalyst and the company’s long-term progress.

First Reason For Upside

On June 4, 2014, Ocean Rig signed a drilling contract for one of its semi-submersible drilling rigs, the Eirik Raude. The contract is for a minimum six well program for an estimated duration of 260 days and with an estimated backlog of $165 million. The key positive here is that Eirik Raude was going off contract in 4Q14. With the new contract, the drillship will be on high utilization for another year. More importantly, the contract has come in a relatively challenging market condition and the order backlog boost is positively reflected in the stock.

Second Reason For Upside

On June 5, 2014, Ocean Rig signed a six year contract for offshore drilling operations in Angola for its ultra deepwater drillship the Ocean Rig Skyros. The contract is expected to commence in the third quarter of 2015 and has an estimated backlog of $1.3 billion. Even for Ocean Rig Skyros, the existing contract was expiring in 1Q15. The new contract ensures continuity for the rig for another six years with a bulk addition to the order backlog.

Also, with this contract, all of the company’s operational rigs are not contracted until the second quarter of 2015. With two more redeliveries in the second and third quarter of 2015, it is likely that there will be more contracts new in the foreseeable future.

Third Reason For Upside

Ocean Rig declared its first quarterly dividend of $0.19 per share in May 2014. In relatively challenging market conditions for the rigs, the sustenance of dividends was a concern. However, all contracted rigs for at least one year ensures that the quarterly dividends will keep coming even if dividends remain at the same level. At a current market price of $18.96, Ocean Rig offers a dividend yield of 3.8%. This is low as compared to the bigger players such as Seadrill (SDRL) or Ensco (ESV). However, the new generation fleet is the reason to remain invested in Ocean Rig.

More Positives In The Pipeline

Ocean Rig Apollo is scheduled for delivery in 2015 and is contracted in Congo until the first quarter of 2018. This rig will provide revenue growth for 2015. Ocean Rig Santorini is expected to be delivered in June 2016. This rig will provide revenue growth for 2016 and 2017. However, Ocean Rig Santorini is still not contracted. This is a risk and also a stock upside trigger. Once the rig is contracted, the swelling backlog will provide further stock momentum.

Also, the estimated available drilling days for 2Q14 and 4Q14 is higher than the actual drilling days for 1Q14. This implies that the next few quarters will be more robust than the first quarter. The total drilling days for 1Q14 was 659 and is expected to rise to 728 in 2Q14 and 828 in 3Q14. Investors can expect strong quarters ahead and this will keep the positive momentum for the stock going.

Conclusion

I have always maintained my bullish views on Ocean Rig primarily for its modern fleet. The new developments in terms of projects in challenging markets underscore the point that the company’s rigs have strong demand in the market.

As discussed, there are more project contracts likely in the near-term as two of the company’s rigs are redelivered after 2Q15. Further, a contract for the new rig to be delivered in 2016 can also be expected relatively soon.

Finally, the company is well positioned to sustain its dividends and looks attractive at an EV/EBITDA of 10.3 with Seadrill trading at an EV/EBITDA of 12.4 and Pacific Drilling (PACD) trading at an EV/EBITDA of 11.4. The bullish upside momentum should therefore sustain for Ocean Rig.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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