Ocean Rig - First-Quarter 2016 Results Complete Review

| About: Ocean Rig (ORIG)

Summary

ORIG released its 1Q'16 on May 20, 2016. Revenue was $508.01 million, up 6.8% quarter over quarter. Very impressive balance sheet overall, with cash on hand of $828 million.

ORIG continued to purchase the 2017 and 2019 notes and recorded a gain of $125 million this quarter. However, ORIG did not purchase more note since March 7, 2016.

I believe the stock is about to reach a new high around $3-$3.25, based on the technical "golden cross" forming potential.

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Source: Ocean Rig Skyros.

This article is an update of my previous article on Ocean Rig UDW (NASDAQ:ORIG), published on March 9, 2016.

ORIG is a fairly new offshore drilling company providing oilfield services for offshore oil and gas exploration, development and production drilling.

The ORIG's newly unrestricted subsidiary agreed to purchased all of DryShips Inc.'s shares in Ocean Rig for total cash consideration of approximately $49.9 million. A quick calculation indicates that the deal translated to $0.89 per share, which is excellent for ORIG, which is retiring 40.4% of its shares outstanding, or 56.079 million shares.

I commented on the transaction on April 5, 2016. I advise you to read the details.

Ownership relationships between ORIG, DRYS, and CEO George Economou.

Today, April 5, 2016, Ocean Rig announced the following:

Its unrestricted subsidiary has agreed to buy all of DryShips Inc.'s shares in Ocean Rig for total cash consideration of approximately $49.9 million. This transaction was approved by the disinterested members of the Company's Board of Directors and is subject to standard closing conditions. After this transaction, DryShips Inc. will no longer hold any equity interest in Ocean Rig.

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
March, 31, 2016 138,666,384

56,079,533

40.44%

7,421,860

5.35%
April 6, 2016 (See note below) 82,586,851 0 0 7,421,860 8.99%
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Note from the last amendment #3 to Form F-4 registration Statement.

Redomiciliation Share Conversion

We are authorized to issue up 1,000,000,000 common shares, $0.01 par value per share, as well as up to 500,000,000 preferred shares, $0.01 par value per share. As of April 6, 2016, we had 82,586,851 common shares outstanding after giving effect to the purchase by our unrestricted subsidiary, Ocean Rig Investments Inc., of 56,079,533 shares of our common stock from DryShips as described above under "Recent Developments.

In the Redomiciliation, each common share of Ocean Rig (Marshall Islands) that is issued and outstanding immediately prior to the Effective Time will automatically convert by operation of law into one share of common stock of Ocean Rig (Cayman Islands).

Important Note: The "Dondero Group" owns -- click to get the SC 13G-A May 4, 2016 -- a very large part of the shares of ORIG. M. James Dondero declared in this last filing that he owns 13.7 million shares and Ms. Nancy Dondero owns 4.8 million shares...

Fleet Analysis as of March 7, 2016

1 - Ultradeepwater Drillships

#

Name

Year

Built

Generation

Day-rate $K

Contract

End

Location

Client

Info.
1

Ocean Rig Olympia

2011

6-DP class 3

Terminated for convenience

West Africa

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

443/512

Q1/18

Brazil

[Petrobras]

4

Ocean Rig Corcovado

2011

6-DP class 3

450/512

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

7

Ocean Rig Athena

2014

7-DP class 3

662

Q2/17

up to 2 years option

[ConocoPhilips]

Angola

8

Ocean Rig Apollo

2015

7-DP class 3

Terminated for convenience.

Termination fee over 2017 accepted.

9

Ocean Rig Santorini

Q2 2017

7-DP class 3 Available
10

Ocean Rig Crete

Q1 2018

7-DP class 3 - 12k' Available
11

Ocean Rig Amorgos

Q1 2019

7-DP class 3 - 12k' Available
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2 - UDW Semi-Submersible Rigs

#

Name

Year

Built

Generation

Day-rate $K

Contract

End

Location Info.
1

Eirik Raude

2002

5-DP class 3

Idle

$62 million in backlog disputed with Premier Oil.

2

Leiv Eiriksson

2001

5-DP class 3 or anchor

145

9/16

Norway

[RM Norway]

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Note: ORIG bought through its subsidiary the UDW Drillship Cerrado at auction for a whooping total of $65 million. I commented on the acquisition on April 29, 2016.

Total backlog as of May 17, 2016 amounted to $2.43 billion.

ORIG 5/17/2016 2016 2017 2018 2019 2020 2021 Dayrate
Eirik Raude (Terminated dispute) 0,0 0,0 0,0 0,0 0,0 0,0 0,000
Leiv Eiriksson 7,0 0,0 0,0 0,0 0,0 0,0 145,000
SemiSub total 7 0 0 0 0 0
Olympia (Terminated dispute) 0,0 0,0 0,0 0,0 0,0 0,0 0,000
Poseidon 7,5 6,0 0,0 0,0 0,0 0,0 537,127
Mykonos 7,5 12,0 4,0 0,0 0,0 0,0 476,348
Corcovado 7,5 12,0 6,0 0,0 0,0 0,0 512,000
Mylos 4,7 0,0 0,0 0,0 0,0 0,0 651,310
Skyros 7,5 12,0 12,0 12,0 12,0 9,0 558,203
Athena 7,5 6,0 0,0 0,0 0,0 0,0 706,026
Apollo (termination fee/month) 0,0 0,0 0,0 0,0 0,0 0,0 0,000
Paros 0 0 0 0 0 0 0,000
Santorini 0,0 0,0 0,0 0,0 0,0 0,0 0,000
Crete 0,0 0,0 0,0 0,0 0,0 0,0 0,000
Amorgos 0,0 0,0 0,0 0,0 0,0 0,0 0,000
Drillship total 42 48 22 12 12 9
98 96 44 24 24 18
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Details of the ORIG backlog:

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Financial Snapshot as of May 19, 2016

Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014

Revenues from Drilling

in $ million

508.007 475.73 437.17 433.22 402.083 499.37

Operating expense

in $ million

145.559 150.93 135.48 142.79 152.927 194.82

Operating income

In $ million

257.685 (214.80) 188.75 178.86 132.80 188.71

Adjusted EBITDA

in $ million

342.986 300.84 273.43 262.21 218.97 276.70

Net Income including special write-offs

Net income

$ million

163.0

288.024

(174.4)

103.6

138.4

80.42

74.87

74.87

41.14

41.14

87.51

87.51

EPS

EPS Including special write-offs

$ million

1.17

2.07

(1.26)

0.75

0.97

0.58

0.54

0.54

0.32

0.32

0.66

0.66

Total Debt

$ million

4,071.1 4,328.5 4,672.0 4,811.7 4,823.2 4,372.5

G&A

in $ million

18.812 23.67 23.24 25.41 28.001 34.83

Interest plus finance costs

in $ million

59.701 68.21 67.17 73.47 61.69 62.33

Cash on Hand

$ million

827.890 747.49 895.76 833.55 520.60 531.50

Impairment charge

In $ million

0 415.0 - - - -

Share Outstanding

in million

138.666 138.666 138.666 137.83 131.993 132.02
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Calculation Net debt/Adjusted EBITDA => 3.45

4Q'14 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16
Adjusted EBITA/Quarter 276.70 218.97 262.21 273.43 300.84 342.99
Adjusted EBITA/Year - - - 1,031 1,055 1,179
Cash on Hand 531.5 520.6 833.55 895.76 747.49 827.89
Total debt 4,373 4,823 4,812 4,672 4,329 4,071
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I think what characterizes the strength of the company the most, is the cash on hand, whereas the company purchased a great deal of the 2017 and 2019 note totalling $1.3 billion initially since late 2015:

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Commentary:

ORIG released its 1Q'16 results on May 20, 2016. It was another good and impressive quarter, without any doubt, which will be certainly cheered, today, by investors and shareholders.
I was particularly pleased with the company's cash on hand now at $828 million. I will not talk further about the balance sheet, and I believe what you see above is enough to get a good idea of the past financial situation.
Unfortunately, this is not really what moves the market, right now, and attracts investors' and shareholders' interest.
It is the "future expectation" that will give the future direction of the price per share. This is what I will focus in my comment below and the sensible issues that IRIG will have to deal with.

1 - Purchase of the 2017/2019 notes.

The company indicated a gain of $125 million for the 1Q'16.

Non-cash gains associated with the purchase of the 7.25% Senior Unsecured Notes due 2019 and the 6.5% Senior Secured Notes due 2017 totaling $125.0 million, or $0.90 per share.

Note Purchase history:

In 3Q'15 the company indicated:

Included in the third quarter 2015 results are non-cash gains associated with the purchase of the 7.25% Senior Unsecured Notes due 2019 and the 6.5% Senior Secured Notes due 2017 totaling $52.2 million or $0.36 per share.

in 4Q'15:

Non-cash gains associated with the purchase of the 7.25% Senior Unsecured Notes due 2019 and the 6.5% Senior Secured Notes due 2017 totaling $137.0 million, or $0.99 per share.

As of March 7, 2016, the Company had purchased $369.0 million in principal amount of the 7.25% Senior Unsecured Notes due in 2019 and $340.3 million of the 6.5% Senior Secured Notes due in 2017, resulting in a total gain to the Company of $314.2 million.

ORIG in $ million 3Q'15 4Q'15 1Q'16 Total Purchased 2017 2019
Gain 52,2 137,0 125,0 314,2 - -
Acquisition amount 117,8 309,3 282,2 709,3 340.3/800 369.0/500
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This quick demonstration shows that ORIG has not purchased anymore note 2017/2019, since March 7, 2016.

It is a clear disappointment, in my opinion, because I believe the company should see it, as THE number one action, especially for the Note Sept. 2017 that remains at $459.7 million.

Assuming that the cash on hand is still well above $700 million -- after acquiring the OR Paros for $65 million, and buying the DRYS Stake for $49.9 million -- I do not see why ORIG should not continue to reduce the debt due until 2019, and still enjoy approximately 45% in profit.

It is imperative to purchase another $200 million of the Note 2017 during 2Q'16 for approximately $120 million, and try to retire totally the note 2019 (which may cost only $55 million.) Leaving approximately $250 million of the 2017 note by the end of June 2016, and eventually make a cash tender offering to retire the amount remaining.

2 - The Situation about the three newbuilds.

Surely here is where the real weakness lies. The company has committed a CapEx of approximately $1.8 billion, and ordered three UDW drillships 7G that it will not need before 2021-2022, at the least.

The market is terrible with a big T, and most of the companies that have reported already, have indicated that a recovery is not foreseen before 2018-2019, thereby, the rig oversupply we are experiencing now, will not be resolved before 2020.

In short, ORIG doesn't need these three drillships, period, and should cancel the Crete and Amorgos and push delivery of the Santorini to 2021. Yes, it may cost, but it will be better long-term.

If we look at the balance sheet, the company has already advanced $413.5 million classified as "Advances for drilling units under construction and related costs". It means that ORIG will have to pay another $1.4 billion to receive these three new-builds without a long-term contract attached.

Meanwhile, while we struggle through this bear cycle, opportunities of distressed assets will increase many folds. Already, ORIG bought the OR Paros which is an UDW 2011 6G comparable to the OR Corcovado for example (same Shipyard, same specification and same year.) With a minimum of TLC, certainely not over $100 million, the drillship will be comparable probably to the OR Santorini.

The price agreed for these three UDW is now well overblown due to the market situation, and if ORIG wanted to order a fourth UDW now, I am sure the company would pay a fraction of the $630 million, and probably no more than $400 million.

I do not pretend to tell ORIG what to do. But, this situation must be resolved quickly.

Conclusion:

ORIG has an excellent balance sheet with a significant liquidity. It is truly an advantage while the industry struggles through this bear cycle. Many investors have been criticizing M. George Economou but the fact establishes that he has done a serious job and took advantage of the situation, instead of turning ORIG to a victim.
Shareholders cannot blame him for the precipitous decline in the stock price since the beginning of 2015. It would just be unfair.

However, while M. George Economou cannot be qualified as an angel by any mean, his interests seem aligned with the stockholders until now. We will have to find out what is the real purpose of this new subsidiary, down the road, and why the shares purchased from DRYS haven't been retired yet?

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The technical analysis of the stock price has shown that $2.50, at the end of May, was a strong "sell signal", because the RSI (14) was indicating a record high at 90. I advised my followers to sell a piece of their holdings to take advantage of this overbought situation.

Since then, the stock slowly retraced following the 200MA, which was quite bullish, and implied a "higher lows, higher highs" type of trend. Assuming no surprised negative news (another termination risk, such as the OR Athena in Senegal that has ended up working for Cairn now), I believe the stock is about to reach a new high around $3-$3.25, based on the technical "golden cross" potential (bullish crossing of the 200MA by the 50MA).

Long-term the situation is too delicate to eventually venture an intelligent guess. However, if oil manages to trade above $50 and stay at that place, then we may eventually reach the $6-$8 before the end of 2016. Risks are plenty so.

Note: Do not forget to be one of my followers on ORIG and get updated. Thank you.

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 trade the stock as well.