ENI Terminates The Ocean Rig Olympia Early Due To Dramatic Fall In Oil Prices

| About: Ocean Rig (ORIG)

Summary

Today, ENI announced that it has terminated the Ocean Rig Olympia due to "a dramatic fall" in the price of oil.

Assuming an 85% termination fee, and based on 160 days remaining, ORIG should be entitled to receive a lump sum of approximately $90 million.

ORIG is going to struggle in 2016, but should weather the storm. I believe the stock is oversold, however, as the risks are high as today's news shows.

Source: Ocean Rig Olympia.

This article is an update of my previous article on Ocean Rig UDW (NASDAQ:ORIG) published on Dec. 8, 2015. ORIG is a fairly new offshore drilling company that provides oilfield services for offshore oil and gas exploration, development and production drilling. The company is based in Nicosia, Cyprus. Ocean Rig was a subsidiary of DryShips, Inc. (NASDAQ:DRYS).

However, on July 30, Ocean Rig announced that it will exchange the remaining outstanding balance of $80 million borrowed by DryShips for 17,777,778 shares of ORIG owned by DRYS, or $4.50 a share. DRYS now owns 40.4% of ORIG; for more details, please see this article from July 30.

Table: New Ownership Relationships Between ORIG, DRYS, and CEO George Economou

Effective Date

ORIG Shares Outstanding

Ocean Rig Shares Owned by DryShips

Ocean Rig Shares Owned by CEO George Economou

Number of Shares Percentage of Shares Outstanding Number of Shares Percentage of Shares Outstanding

Sept. 30, 2015

138,666,384

56,079,533

40.44%

7,421,760

5.35%
Click to enlarge

Today, Jan. 21, 2015, Ocean Rig UDW announced the following:

'Due to the dramatic fall of the crude oil price and the volatile market context, ENI has reassessed its drilling activities and taken the decision to exercise its right of terminating' the contract of the Ocean Rig Olympia.

Fleet Analysis as of Jan. 21, 2016

Ultradeepwater Drillships

# Name

Year

Built

Generation

Day-rate $K

Contract

End

Location

Client

Mobilization expected
1 Ocean Rig Olympia 2011

6-DP class 3

589.2

6/16

Early termination

[ENI]

Angola

2 Ocean Rig Poseidon 2011

6-DP class 3

456 to 564+

(Price linked to oil price)

Q2/17

2 x 1Y option

Angola

[ENI]

3 Ocean Rig Mykonos 2011

6-DP class 3

443.8/512.4

Q1/18

Brazil

[Petrobras]

4 Ocean Rig Corcovado 2011

6-DP class 3

450.1/512.4

Q2/18

Brazil

[Petrobras]

5 Ocean Rig Mylos 2013

7-DP class 3

626.3

Q3/16

Brazil

[RepsolSinopec]

6 Ocean Rig Skyros 2014

7-DP class 3

518/566

Q3/21

[TOTAL]

Angola

(15d) 4Q'15

7 Ocean Rig Athena 2014

7-DP class 3

661.8

Q2/17

up to 2 years option

[ConocoPhilips]

Angola

8 Ocean Rig Apollo 2015

7-DP class 3

595.8

Q2/18

[Total]

Congo

9 Ocean Rig Santorini

Q2'16

Q2 2017

7-DP class 3 Available Delivery pushed 12 months.
10 Ocean Crete Q1 2018 7-DP class 3 - 12k' Available Delivery pushed one year at minimal cost
11 Ocean Amorgos

Q1 2019

7-DP class 3 - 12k' Available Delivery pushed one year at minimal cost
Click to enlarge

UDW Semi-Submersible Rigs

#

Name

Year

Built

Generation

Day-rate $K

Contract

End

Location Mobilization expected/note
1 Eirik Raude 2002

5-DP class 3

559.4

1/16

3 x 1 Y Option

Falkland Is.

[Premier oil/Noble]

May be cold stacked after 1/16 if not contracted with possible scrapping?

2 Leiv Eiriksson 2001

5-DP class 3 or anchored

561.35

3/16

Option Through 2018

Norway

[RM Norway]

May be cold stacked after 3/16 if not contracted with possible scrapping?
Click to enlarge

On Sept. 11, 2015, the company entered into an agreement to provide third-party technical management services for the offshore drilling unit Cerrado.

Commentary

It is exactly this type of news that many offshore drillers are now dreading receiving from their panicking clients, who are trying desperately to cancel any project they can and hide under the first large rock they can find. Today, ENI (NYSE:E), a major integrated company, decided to terminate the Ocean Rig Olympia, which was supposed to work for ENI in Angola West Africa until June 2016 -- or 160 days early. The question is: Does this early termination come with an early termination fee?

The news is not really helping in this matter. However, It is probable that ORIG will get compensated. Assuming a 85% termination fee, and based on 160 days remaining, ORIG should be entitled to receive approximately a lump sum of $90 million. The Ocean Rig Olympia will be probably cold stacked, due to the market condition.

The same rig had been terminated by Total (NYSE:TOT) early in 2015 and we still do not know what has been decided about the six-month early termination fee:

TOTAL E&P ANGOLA has notified us its intentions to redeliver the Ocean Rig Olympia on completion of its present well expected in the first quarter of 2015 and ahead of the contractual redelivery date of Aug. 2015. We are presently in discussions with Total EP Angola and intend to legally defend our rights should we fail to reach an amicable solution. The backlog calculation for the Ocean Rig Olympia assumes that the unit is used to perform the balance of the New ENI contracts starting in the fourth quarter of 2015 which remains subject to various conditions, including approval from national authorities.

We do not know what will happen about the semi-submersible OR Eirik Raude, which is still drilling in the Falklands. But it's quite clear now that the rig will not get any extension, as I was hoping for, due to the terrible market conditions.

Disclosure: I am/we are long ORIG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have a small long position and I trade often the stock