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Summary

  • Ocean Rig UDW released its second-quarter results on August 5. The street was pleased again with the outstanding results.
  • ORIG now owns nine ultra-modern active rigs and four others in-construction. The company has an impressive backlog of $4.8 billion, which is shielding the company from any temporary market softness.
  • ORIG is a definitive money maker machine, and I believe the stock price is far from reflecting the company intrinsic value. The 4.4% dividend is another incentive to buy.

Ocean Rig UDW (NASDAQ:ORIG)

Ocean Rig Poseidon. Source: Orig website.

ORIG is an international mid-tier offshore drilling contractor providing oilfield services for offshore oil and gas exploration, development and production drilling. It is specialized in the ultra-deepwater and harsh environment category of the offshore drilling industry. The company is based in Nicosia, Cyprus. Ocean Rig UDW Inc. Is a subsidiary of DryShips Inc. (NASDAQ:DRYS) with an ownership of 59.4% at the end of 2013.

The company has 1,477 employees.

The company owns and operates 13 offshore ultra-deepwater drilling units, comprising two ultra-deepwater semi-submersible drilling rigs and 11 ultra-deepwater drillships. Ocean Rig Skyros and Ocean Rig Athena were delivered to the company in 2014, and two other rigs are scheduled to be delivered during 2015-2016; the Ocean Rig Apollo (Already rented to Total in Congo early 2015), and Ocean Rig Santorini with a delivery deferred until June 2016. Two new rigs were ordered recently the Ocean rig TBN1 and TBN2 (TBN: to be named) with a delivery scheduled for Q1 and Q2 2017 at a cost of $685 million each. The design for the 2 new rigs TBN has been discussed by the company and about 10 clients, to find the exact specifications desired, per the conference call.

It is important to indicate also that ORIG decided to join the dividend offshore drillers' club, and will pay a dividend of 0.19/Q per share for the second-quarter, which represents about 4.4% per annum. The dividend will be determined on a quarterly basis. ORIG is a rapid growth offshore driller, and grew rapidly since 2010.

George Economou, CEO, said recently:

We are very pleased with our operating performance, which is a testament to the superior operating results associated with modern assets and the collective efforts of our operating team. During the second-quarter of 2014, our fleet operated at 96.3% utilization which is in line with our operating performance in 2013 as well as that of our fleet...

Furthermore, the Master Limited Partnership, MLP, is scheduled for the end of 2014. George Economou, CEO, said at the last conference call:

Another significant value creation initiative is goal to launch the initial public offering of a new master limited partnership subsidiary by the end of 2014. We are continuing to work towards achieving this objective. And as part of it, we successfully completed the refinancing of the $1.35 billion bank and ECA facility with our new $1.3 billion secured, senior secured term loan B facility.

YTD chart:

ORIG Chart

ORIG data by YCharts

Complete fleet analysis as of August, 2014.

1 - Ultra-Deep Water Drillships. (Updated July 31, 2014)

#Name

Year

Built

Generation

Contract

End

Location

Client

Estimated backlog

$ million

1Ocean Rig Olympia20116-DP class 3

Q3/15

Option mid-17

Gabon-Angola

Total

225
2Ocean Rig Poseidon20116-DP class 3

Q2/16

Option mid-18

Angola

ENI

476
3Ocean Rig Mykonos20116-DP class 3

Q1/15

Brazil

Petrobas

106
4Ocean Rig Corcovado20116-DP class 3

Q2/15

Brazil

Petrobas

133
5Ocean Rig Mylos20137-DP class 3

Q4/16

Option 2018

Brazil

Repsol

531
6Ocean Rig Skyros20147-DP class 3

Q4/14

Q3/21

Angola

Total

171

1,298

7Ocean Rig Athena20147-DP class 3Q2/17

Angola

ConocoPhilips

686
8Ocean Rig Apollo20157-DP class 31/15-Q1/18

Congo

Total

681
9Ocean Rig Santorini06-20167-DP class 3Available--
10Ocean Rig TBN1Q1 20177-DP class 3 - 12k'Available--
11Ocean Rig TBN2Mid-20177-DP class 3 - 12k'Available--

Per the conference call:

We are in advance discussion and in [indiscernible] through entering into two additional long term contracts for the Corcovado and Mykonos which will keep the close ship employed until 2018.

2 - UDW Semi-Submersible rigs. (Updated July 31, 2014)

#Name

Year

Built

Generation

Contract

End

Location

Estimated backlog

$ million
1Eirik Raude20025-DP class 3

Q4/14

Q3/15

Option Q3/17

W. Africa

Falkland Is.

72

164

2Leiv Eiriksson20015-DP class 3 or anchored

Q2/16

Option Trough 2018

Norway

RM Norway

340

The actual backlog today stands at $4.8 billion.

Furthermore, Gilles Bocabarteille, COO, said at the conference call:

The average term of our contracts is 2.3 years of 3.8 years including our options. Excluding operational periods, we are under a contract for 100% of 2014, 72% of 2015 and even 39% for 2016.

Day rate average for the 9-month 2014:

NameDay rate $RIG Opex $
Leiv Eiriksson551,600221,544
Eirik Raude575,000176,401
Average563,300198,973
OCR Corcovado458,900193,285
OCR Olympia589,200199,325
OCR Poseidon685,600184,956
OCR Mykonos453,900206,328
OCR Mylos626,300192,877
OCR Skyros571,300176,742
OCR Athena636,800178,061
Average574,571190,225

During the second-quarter 2014, ORIG had 724 revenue earning days, which represents an operating efficiency of 96.3%.

The company expects to increase the number of revenue earning days in the Q3 2014.

Per the conference call:

So Ocean Rig's cash flow breakeven level is at a very low day rig level. Any cash flow above this point can be used to create additional value. The average contracted met day rates for our fleet is $516,000 adjusted for utilization, local taxes and other top line items.

The gross level is approximately $600,000 a day, which results net cash flow of $165,000 per day or about $60 million per unit per year on a nine-unit fleet basis. The free cash flow is a little bit in excess of $0.5 billion per year.

Financial snapshot as of August 5, 2017.

Link: Ocean RIG UDW Inc. Reports Financial and operating results for the second-quarter 2014.

QTQ %Q2 2014Q1 2014
Revenue from Drilling in $ million+22.4441.4360.8
Operating expense in $ million+20.86183.1151.5
EBITDA in $ million+34.6231.8172.2
Net Income in $ million+223.869.631.1
EPS in $ (Excluding special item)+220.80.530.24
Total Debt $ million04,397.44,409.4
G&A in $ million-20.92835.4
Interest plus finance costs in $ million-3357.786.1
Dividend per share $-0.190.19
Cash on Hand $ million-0.264536.04728.15

Link: Second-quarter 2014 presentation.

Link: Conference call second-quarter. (Released yesterday.)

Commentary:

Ocean Rig UDW is a newly created offshore drilling company which owns a very modern and efficient rig fleet as we can easily see it above. The recent financial results are quite impressive, and the backlog now stands at $4.8 billion, insulating ORIG from any actual softness of the UDW and Deepwater market.

ORIG is a perfect example of a modern fleet that can generate an excellent revenue and cash flow positive regularly, by managing to contract its fleet at a high-level day rate, due to its high-standard characteristics. Needless to say again how important it is to own a state-of-the-art fleet of rigs from the 5th, 6th and 7th generation, especially in this challenging market environment.

When we analyze the floaters situation in general (per ORIG presentation):

MidwaterDeepwaterUDWTotal
Rig in service10650148304
Rig newbuild878196
Age32284-

We notice a lot of disparity between the three main categories. The midwater segment is getting obsolete rapidly with an age average of 32; the deepwater segment is growing older quite fast too. The only sector that is expanding now is the Ultra deepwater segment.

ORIG owns only 9 UDW of the 5th and 6th generation, and two harsh-environment semi-submersible rigs; all well contracted into 2015 and after. This company owns a state-of-the-art fleet with a high-margin profitability.

Here is a general and interesting situation of the fleet composition in the offshore drilling sector (8 different companies), from Pacific Drilling SA's (NYSE:PACD) last presentation:

(click to enlarge)

George Economou, CEO, said at the recent conference call:

Well, it means a couple of things. In essence Ocean Rig is completely insulated from the current soft patch in the market. And we're poised to take advantage of the expected market upturn in 2016 and beyond.

Note: Some investors may be reluctant to invest in ORIG because of the connection to Dryships Inc. (DRYS) majority ownership, and George Economou as CEO. This situation could explain in part, the low stock price value compared to its intrinsic value, and consequently offers a buying opportunity for any savvy investors.

I recommend the stock as a BUY.

Source: Ocean Rig UDW: Fleet Analysis As Of August 2014, And Second-Quarter Results