Offshore drilling companies have been hammered in the recent past and Ocean Rig (ORIG, Financial) is no exception with the stock down by 28% in 2014. However, Ocean Rig came out with a strong set of third-quarter numbers and the company’s results beat the street estimates. I believe that sentiments are positive on Ocean Rig and the stock can move higher from current depressed levels on strong results and a strong growth outlook. This article discusses the company’s results and the other positive factors related to ocean Rig at this point of time.
For the third quarter of 2014, Ocean Rig reported revenue increase of 56.9% to $515.5 million as compared to $328.5 million in the third quarter of 2013. Further, the company reported an EBITDA increase of 74.6% to $281.8 million in 3Q14 as compared to $161.4 million in 3Q13. The growth in revenue and EBITDA was driven by addition to the current fleet along with robust operating efficiency of 98.6%.
While the company’s growth was robust backed by fleet increase, the key factor is if the company’s growth will sustain in the foreseeable future. This factor will determine the extent of upside in the stock for the remainder of 2014 and in 2015.
Ocean Rig is well placed from that perspective with 100% contract coverage in 2014 and 87% contract coverage in 2015. Even the contract coverage for 2016 is robust at 64% and this means that Ocean Rig has a very strong revenue visibility. As of 3Q14, Ocean Rig had an average contract remaining period of 2.7 years with an order backlog of $5.5 billion. These numbers imply that strong growth will continue for Ocean Rig in 2015 amid challenging market conditions. This makes Ocean Rig an attractive stock to consider after a correction of 28% in 2014.
Ocean Rig further has a new rig for delivery in January 2015 and another rig for delivery in June 2016. Further, two rigs are slated for delivery in 2017. The delivery of new rigs will also ensure that revenue growth remains robust over the next few years.
In difficult times, it is also important to consider the company’s debt profile and the debt burden. Ocean Rig has a very balanced debt maturity profile with no major debt maturity before 2017. This means that there is no immediate debt refinancing pressure and with quarterly EBITDA nearing $300 million, the company is well positioned to service the existing debt.
Besides the strong growth prospects, Ocean Rig has also announced a quarterly dividend of $0.19 per share, and this implies an annual dividend payout of $0.76. At a current stock price of $13.87, Ocean Rig is also offering a healthy dividend yield of 5.5%, which comes with strong revenue and EBITDA growth prospects. Therefore, there is more than one reason to be bullish on Ocean Rig.
I must also add here that Ocean Rig is also targeting a MLP and it is largely dependent on existing market conditions. I believe that the offshore market is due for revival and improvement in 2015 and 2016 and a MLP can potentially be seen in 2015 from Ocean Rig.
From a valuation perspective, Ocean Rig is trading at an EV/EBITDA of 6.66 and the valuations are attractive considering the company’s modern fleet and high contract coverage for 2015 and 2016. Pacific Drilling (PACD, Financial) is currently trading at an EV/EBITDA of 8.8 and this is indicative of the discount at which Ocean Rig is currently trading. I therefore expect Ocean Rig to move significantly higher from current levels.
In conclusion, Ocean Rig’s strong results will continue and the company is well positioned to grow even in difficult market conditions. At attractive valuations, Ocean Rig also offers a healthy dividend yield and the stock certainly looks interesting for consideration for the portfolio.
