Ocean Rig UDW Inc. (ORIG, Financial) is an offshore drilling service provider. It provides oilfield services for offshore oil and gas exploration and specializes in ultra-deep water drilling industry. As of today, the company owns and operates 11 offshore ultra deep water drilling units, which comprises of two ultra deepwater semisubmersible drilling rigs and nine ultra deepwater drillships. The company has robust growth prospects and strong revenue visibility. This article discusses why Ocean Rig could be a potential value creator.
Grossly Undervalued
According to analyst estimates, Ocean Rig has an earnings growth prospect of 73% in 2014 and 51% in 2015. A robust growth with a current PE of 36.5 translates into a PEG of 0.5 and 0.7 for 2014 and 2015, respectively. A PEG of less than 1 does suggest undervaluation. Further, if we compare the company’s valuation with peers Ensco Plc (ESV, Financial) and Transocean Ltd. (RIG, Financial), Ocean Rig looks grossly undervalued.
| Ocean Rig | Current | 2014E | 2015E |
| PE | 36.5 | Â | Â |
| Growth | Â | 72.7 | 50.6 |
| PEG | Â | 0.5 | 0.7 |
| Transocean | Â | Â | Â |
| PE | 10.5 | Â | Â |
| Growth | Â | 14.5 | 2.9 |
| PEG | Â | 0.7 | 3.6 |
| Ensco | Â | Â | Â |
| PE | 8.54 | Â | Â |
| Growth | Â | 4 | 12 |
| PEG | Â | 2.1 | 0.7 |
Robust Revenue and Earnings Forecast
There are two scenarios for revenue forecast in fiscal 2014: base and stress case analysis. Considering the fact that everything works according to the company plans, a base case scenario is created. Based on the current day rates and the company’s efficiency guideline of 92.5%, forecasted revenue for fiscal 2014 is $1.6 billion, a robust 34% increase from fiscal 2013.
| Revenue forecast 2014 ( Base Case) | ||||
| Â | Day rate | Utilization rate | Available drilling days | Revenue |
| Leiv Eiriksson | 550500 | 92.50% | 365 | 185862563 |
| Eirik Raude | 575000 | 92.50% | 350 | 186156250 |
| OCR Corcovado | 446700 | 92.50% | 365 | 150817088 |
| OCR Olympia | 588500 | 92.50% | 365 | 198692313 |
| OCR Poseidon | 681800 | 92.50% | 365 | 230192725 |
| OCR Mykonos | 442700 | 92.50% | 365 | 149466588 |
| OCR Mylos | 604100 | 92.50% | 365 | 203959263 |
| OCR Skyros | 570700 | 92.50% | 306 | 161536635 |
| OCR Athena | 636200 | 92.50% | 185 | 108869725 |
| Â | Â | Â | Â | Â |
| In $ Millions | Â | Â | Â | 1576 |
| Â | Â | Â | Â | Â |
| Revenue for 2014 ($ millions) | Â | Â | Â | 1576 |
| Increase | Â | Â | Â | 33.60% |
The assumption for stress case analysis is OCR Athena is not delivered in fiscal 2014. Still the company is in a position to increase its revenue by 24% to $1.5 billion from $1.2 billion in 2013.
| Revenue forecast 2014 ( Bear Case) | ||||
| Â | Day rate | Utilization rate | Available drilling days | Revenue |
| Leiv Eiriksson | 550500 | 92.50% | 365 | 185862563 |
| Eirik Raude | 575000 | 92.50% | 350 | 186156250 |
| OCR Corcovado | 446700 | 92.50% | 365 | 150817088 |
| OCR Olympia | 588500 | 92.50% | 365 | 198692313 |
| OCR Poseidon | 681800 | 92.50% | 365 | 230192725 |
| OCR Mykonos | 442700 | 92.50% | 365 | 149466588 |
| OCR Mylos | 604100 | 92.50% | 365 | 203959263 |
| OCR Skyros | 570700 | 92.50% | 306 | 161536635 |
| Â | Â | Â | Â | Â |
| In $ Millions | Â | Â | Â | 1467 |
| Â | Â | Â | Â | Â |
| Revenue for 2014 ($ millions) | Â | Â | Â | 1467 |
| Increase | Â | Â | Â | 24.30% |
Ocean Rig has an average contract backlog of $5.4 billion with contract coverage of 99%, 72% and 38% for 2014, 2015 and 2016. This supports the revenue growth as discussed and the company’s estimate of approximately $93 million EBITDA per drillship at 92.5% utilization per year.
Shareholders Value Creation
George Economou, chairman and CEO of the company, has announced a distribution of $25 million every quarter as dividend. With 131.8 million shares outstanding, dividend per share would be $0.18. Considering that there are no subscription and redemption throughout the year. Annual dividend per share would be $0.7, bringing the dividend yield to 4.4%. With free cash flow increasing and earnings going north way, one could expect the dividend to increase as well.
Industry Dynamics Support Growth
The industry factor which supports growth is the huge demand for ultra deepwater units. Super major and major oil companies like Petrobas, Statoil and BP, etc., have represented approximately 80% of the demand. This is primarily because oil companies need exploration drilling to replace reserves and generate additional cash flow. In addition to this, UDW day rates have remained firm and have increased from 450,000 in 2011 to 580,000 in 2013. Thus, it is very likely that the day rates will increase based on the demand for the same from major oil companies.
Conclusion
Ocean Rig looks attractive based on the company’s current valuation, and investors can consider current levels as a good entry point. Moreover, the addition of Ocean Rig Apollo and Ocean Rig Santorini in fiscal 2015 would serve as major stock upside trigger. Also, considering the company’s robust revenue growth with increasing industry demand for UDW, I would recommend Ocean Rig as a good investment opportunity.
