Ocean Rig: An Impressive Hole In The Bear Thesis?

| About: Ocean Rig (ORIG)

Summary

Ocean Rig's subsidiary buys the company's shares from DryShips.

At first glance, this looks bullish.

However, the market's reaction is subdued and rightly so.

OR Mylos

Well, now we know what the $180 million in Ocean Rig's (NYSE: ORIG) unrestricted subsidiary were for. As most of you already read in the news, Ocean Rig's subsidiary bought all DryShips (NYSE: DRYS) shares in Ocean Rig for $49.9 million or $0.89 per share. Without further ado, let me lay out my views on the deal.

First, my condolences to DryShips shareholders. Ocean Rig shares were the lottery ticket for DryShips. Yes, I am bearish on Ocean Rig, but I admit the reality - in certain scenarios Ocean Rig's shares may fly. Now that Ocean Rig's shares are gone at a miserable price, there is very little hope left for DryShips shareholders. This deal highlights the risks of investing in companies led by charismatic founders who might be serving their interests first.

By the way, DryShips' press release also contains the notice that the company sold three vessels along with the associated bank debt to entities controlled by the company's Chairman and CEO, Mr. George Economou. It looks like DryShips is in the process of complete liquidation while Mr. Economou aims to secure control on the assets.

Now, let's get to Ocean Rig. The company just bought 40.44% of its shares back, which should be excellent news in theory. In practice, the excellent news will be the announcement of retirement of those shares. Ocean Rig's press release did not announce any intent to retire the shares.

Without the retirement of the shares, all supposed benefits will be of little use to common shareholders. The EPS number will be higher in case the company reports a profit, but who really cares about EPS numbers during this downturn when the company's survival is at stake?

I would also like to highlight the fact that it was Ocean Rig's new subsidiary that bought the shares, not the company itself. The subsidiary now owns 40.44% of Ocean Rig, and there is no rule precluding someone to own the subsidiary in the future.

These types of deals happen - just look at the vessel deal that was mentioned before the Ocean Rig deal in Dryships' press release. This time, Ocean Rig shareholders got lucky while Dryships shareholders suffered. Next time, it could be the other way round.

In my view, worries about the fate of Ocean Rig's shares held in the subsidiary are the reason why Ocean Rig shares were not skyrocketing at the day of the announcement of the news.

In the beginning of March, the sole announcement of the earnings release date was enough to trigger speculative buying as Ocean Rig enjoyed the flow of swing trading capital along with other beaten oil names. The company's repurchase of 40.44% of its own shares with cash on hand would have been a major upside catalyst if the market believed that these shares will be gone forever.

You can't use the stock market's reaction to any news as an indicator, because the market may be at times very irrational. However, this time I agree with the market's opinion: there is no evidence that the repurchased shares will be cancelled. What's more, the fact that they were bought by the subsidiary along with Dryships' recent deal raise serious doubts that they will ever be retired.

Bottom line

Unless we get to know that the shares are retired, the outlook for Ocean Rig is not changed, and, in my view, remains bearish.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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 may trade ORIG.

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