Ocean Rig: Check-Up List Before Earnings

| About: Ocean Rig (ORIG)

Summary

Ocean Rig will publish its results on May 19 after the market close.

I discuss the key topics of the upcoming report.

I think that several catalysts may show up which will seriously impact Ocean Rig's shares.

Ocean Rig Corcovado

Ocean Rig (NYSE: ORIG) will provide its quarterly results on May 19, after the market close. The heated discussion in the comments section of the most recent article on Ocean Rig, "Addressing Some Recent Misconceptions Regarding Ocean Rig" by fellow contributor Henrik Alex, showed that readers and contributors alike have opposite views on the company and are ready to defend their stances.

In theory, the earnings release and the subsequent earnings call should decrease the uncertainty regarding the company's future. I am not quite sure that this will be the outcome of Ocean Rig's earnings report, but, nevertheless, here's what I will be looking for.

1. The Cerrado purchase. It is clear that nobody else except Ocean Rig showed up. There are several theories on why this happened: a) the drillship is a complete wreck; b) the conditions are just too bad to have any additional drillship in the fleet; c) Ocean Rig's management are geniuses and other teams are less so.

My answer is b), in part because there is no way for me to objectively obtain the information on the a) variant. I absolutely don't believe in the c) variant and don't share the optimism that was expressed by some readers in contributors regarding the purchase.

However, I would like to hear company itself talking on the issue. Any kind of a prearranged contract for Cerrado, which is now Ocean Rig Paros, will send Ocean Rig shares higher. From a fundamental point of view, any contract for Cerrado will mean that contract for other Ocean Rig's drillship was cannibalized.

Nevertheless, I am sure that the market will react positively and such news will create a short-term trading opportunity. At this point, I believe that Ocean Rig Paros was purchased as a pure speculation and that we will not hear news about the contract for the rig.

2. Bond repurchases. The purchase of the drillship, as well as the purchase of Ocean Rig's shares from DryShips (NASDAQ: DRYS), put further debt repurchases under question. In my view, the repurchase of debt at a discount would have been a positive catalyst. In my view, aggressive bets on the offshore drilling recovery are less likely to create value than buying debt. In this light, I will treat the lack of such repurchases as a warning sign.

3. The fate of Ocean Rig shares held by the subsidiary. There are a number of options for Ocean Rig. The recent upside in the company's shares provides the opportunity to sell these shares to investors at a profit and raise cash for the company. The shares can be cancelled. And, in the most realistic scenario, the shares will continue to be held by Ocean Rig Investments.

The first two options are good for shareholders. The third is not necessarily bad as, for example, Ocean Rig may be optimistic about the future of its shares and may want to sell them for an even bigger profit.

However, such an assumption requires putting some faith into the good intentions of Ocean Rig's CEO George Economou. For me, keeping the shares in the Ocean Rig Investments instead of canceling or selling them for a profit is a red flag. I know that a number of contributors and readers have the exact opposite stance on this topic.

4. Further investments by Ocean Rig Investments. The subsidiary has money after the purchase of the drillship and the purchase of the Ocean Rig shares. Will they be used to purchase another drillship if it shows up in the market? Or will they be used to invest in the newly purchased one?

5. Ongoing disputes. I am not a legal expert, so I will just patiently wait for updates on ongoing disputes regarding contract cancellations.

6. Prepayment of the Apollo loan. I expect to hear an exact number. The lower, the better for Ocean Rig, of course.

7. Ocean Rig Santorini. Time goes by, and we already approach the moment when Ocean Rig will likely try to postpone the delivery of Ocean Rig Santorini as market conditions do not warrant taking the delivery of the drillship. I am also wondering how the yard will look at Ocean Rig's purchase of Cerrado when the company has a new build in the pipeline.

The history of previous Ocean Rig's reports and earnings calls shows that we will get some answers, as well as some new questions as well. Given the recent oil price dynamics, any news that can be interpreted as bullish will send Ocean Rig's shares higher.

From a longer-term point of view, everything that goes inside the Ocean Rig Investments is probably the most significant news. I have a negative view on both the Cerrado purchase and the fact that the company did not cancel its shares that were purchased by Ocean Rig Investments. If the company surprises and cancels the shares, I will seriously reconsider my stance on George Economou's intentions.

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.