Ocean Rig (ORIG, Financial), which is an offshore drilling services company, looks attractive at current levels for long-term exposure. This article discusses why Ocean Rig is a good stock pick in the beaten down offshore drilling industry.
The first reason to like Ocean Rig is the fact that the company has one of the most modern rigs in the industry along with companies like Seadrill (SDRL, Financial) and Pacific Drilling (PACD, Financial). A modern rig ensures that the company’s fleet remains competitive even in challenging market conditions.
A good example of the company’s modern rigs remaining competitive in the current market conditions is the recent contract that the company has won for Ocean Rig Poseidon. The rig contract has been extended by one year to the second quarter of 2017 by ENI. In addition to this extension, Ocean Rig won a new contract for Ocean Rig Olympia to drill offshore Angola commencing in the third quarter of 2015. The new contracts increase the company’s contract coverage for 2015 and 2016 and also underscore the point that the company’s fleet is competitive even in difficult market conditions.
The second reason to be bullish on Ocean Rig is strong revenue growth in the coming quarters through existing contracts even in difficult market conditions. For the first quarter of 2015, Ocean Rig reported revenue of $402 million as compared to $361 million for the first quarter of 2014. During the same period, the company reported an EBITDA of $218 million as compared to the prior year comparable period EBITDA of $172 million.
Considering the fact that Ocean Rig’s fleet is 88% contracted for the remainder of 2015, the company’s revenue and EBITDA is likely to remain robust in the coming quarters. Even for 2016, the company’s fleet is already 69% contracted and I believe that the contract coverage is likely to increase in the coming quarters. The recent contract mentioned above would have already had a positive impact on the contract coverage for 2016.
I must also add that Ocean Rig has good fundamentals and even with a total debt of $4.8 billion in the company’s balance sheet, debt servicing is not a concern in the coming quarters with a strong order backlog to back debt servicing. In addition, the company has no significant debt maturity in 2015 and 2016. This implies no debt refinancing pressure for the near-term. A quarterly EBITDA of $218 million implies an annualized EBITDA of $870 million and the EBITDA interest coverage is therefore comfortable.
From an industry perspective, oil prices also seem to have bottomed out and the recent weakening of the dollar has helped oil trend higher. In my view the worst for the offshore industry is over even when the industry will take time to go back to previous levels. Therefore, I do believe that Ocean Rig has also bottomed out and looks good for accumulation at these levels.
In terms of risk, the company has two long-term contracts with Petrobras and I assign some probability of potential cancellation of these contracts due to the bribery scandal in Petrobras. While this risk might not pan out, investors need to remain cautious by considering only some exposure to the stock.
