Ocean Rig's (ORIG) Q1 2016 Results - Earnings Call Transcript

| About: Ocean Rig (ORIG)

Ocean Rig UDW Inc. (NASDAQ:ORIG)

Q1 2016 Earnings Conference Call

May 20, 2016, 08:00 AM ET

Executives

Anthony Argyropoulos - Capital Market Special Advisor to CEO

Anthony Kandylidis - Executive Vice President

Analysts

Ian Macpherson - Simmons & Company

Mark Brown - Seaport Global Securities

Operator

Thank you for standing by ladies and gentlemen and welcome to the Ocean Rig Conference Call on the First Quarter 2016 Financial Results. We have with us Anthony Argyropoulos, Capital Market Special Advisor to CEO and Mr. Anthony Kandylidis, Executive Vice President of the Company. At this time, all participants are in a listen only mode. There will be a presentation followed by a question-and-answer session [Operator Instructions] I must advise you this conference is being recorded today.

Matters discussed in this release may constitute forward-looking statements. Forward-looking statements reflect current views with respect to future events and financial performance and may include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Please take a moment to read the Safe Harbor statement on page two of the slide presentation. Risks and uncertainties are further described in the reports filed by Ocean Rig with the U.S. Securities and Exchange Commission.

And I will now, pass the floor to one of your speakers Mr. Kandylidis. Please go ahead, sir.

Anthony Kandylidis

Thank you. Good morning, everyone and thank you for participating in Ocean Rig’s first quarter earnings conference call. I’m starting with Slide 3. For the first quarter of 2016, Ocean Rig posted a U.S. GAAP net income of $288 million or $2.07 per share. Included in the first quarter 2016 results are non-cash gains associated with a previously announced purchase of 7.25% Senior Unsecured Notes due 2019 and a 6.5 Senior Secured Note due 2017, totaling a 125 million or $0.90 per share.

Excluding these items, the company would have reported net income of a $163 million or $1.17 per share. Our fleets’ strong operating performance during the quarter resulted in net revenue of about $508 million and our EBITDA for the quarter was 343 million.

I turn over the presentation now to Mr. Anthony Argyropoulos.

Anthony Argyropoulos

Thank you Anthony, turning to Slide 4, in Q1 2016 our ultra deepwater fleet achieved 96.3% operational utilization rate, over available contracted drilling days, which excludes mobilization, uncontracted and special survey days. We also remain focus on reducing operating cost without compromising safety and efficiency.

Our fleet average day OpEx in the first quarter of 2016 was about $131,300 per unit per day, excluding lower cost associated with idle units and benefiting from various cost saving initiatives and our robust management system focused on performance and efficiency.

Moving on to Slide 6. The average turn of our contracts is 1.7 years. Excluding optional periods and taking into account only our seven unit operating fleet, were under contracts for 88% of the remaining 2016 and 55% for 2017. The Leiv Eiriksson is currently undergoing a yard stay in Norway before commencing its contract with Lundin during the third quarter of 2016.

Ocean Rig Olympia is currently stocked in Greece and Ocean Rig Apollo is currently in route to its stocking location, which will be in Greece as well. Finally, the Eirik Raude and Ocean Rig Skyros are currently in route to their stocking locations. All four units are available for alternative deployment.

Turning to Slide 7, during the quarter we have 910 calendar days, of which a 171-days were on contracted. Thus our fleet available contracted drilling days for the quarter amounted to 739-days. During this quarter we experienced 27-days fleet wide zero rate downtime and as a results, we are earning revenue for 712-days. So our fleet wide contracted operating efficiency rates that is our revenue earnings days over available contracted drilling days was 96.3% during the quarter.

Our day direct and onshore rig operating expense of this quarter excluding OpEx of the units Olympia, Eirik Raude, Apollo for their respected idle days, averaged to $131,000 versus the $132,000 during the fourth quarter of 2015 and $171,000 in Q1 2015. [Technical Difficulty] initiatives to put in place at this start of this downturn.

Moving on to Slide 8, our income statement to tie all the revenue and operating expense items. During the quarter, we got the $429 million revenue, $79.1 in amortization of deferred revenue. So our total revenue was $508 million. Our direct and onshore rig operating expenses were $105 million. Maintenance and other expenses were $11.9 million. Amortization of deferred expenses was $28.3 million.

So during the quarter our $508 million in total revenues, we had a $145.6 million in total rig expenses. Our depreciation was $85.9 million. Our G&A expenses were $18.8 million while our net interest expense for the quarter was $59.7 million. Finally, we paid $28.8 million in taxes or about 6% on revenues.

Turning on to Slide 9, as of today the amount outstanding of the companies 7.25% quarters, senior unsecured notes due 2019 is a $131 million and the amount outstanding of the companies 6.5% senior secured notes to 2017 is $460 million. Our debts has a weighted average maturity of 4.1-years and there are no significant debt maturities prior to our 6.5% secured notes to of total 2017. Our free cash balance today, is about $700 millions.

Now, I turn over the presentation to Mr. Kandylidis to provide to you some closing remarks.

Anthony Kandylidis

Thank you Anthony. Moving on to Slide 11. I would like to summarize, where the company is today. Ocean Rig is a large global, pure play ultra deepwater drilling company with premium assets run by an experienced management team. Our focus remains on containing costs and maintaining efficiency in order to create value for our stakeholders.

We’re somewhat insulated from the challenging market conditions with a $2.4 billion contract backlog that provides a high level of visible cash flow along with about $700 million of free cash. This allows us to opportunistic case in point, the acquisition over 12 drilling the Cerrado unit a sixth generation ultra deepwater drillship that was acquired at an extremely attractive price. Having said that, our recent contract terminations actively reminder of the extremely challenging times facing the ultra drilling industry and highlight the need for being prudent.

We have now reached the end of our presentation and I open the floor for questions.

Question-and-Answer Session

Operator

Thank you very much indeed, sir [Operator Instructions] Your first question from Simmons comes from the line of Ian Macpherson. And your line is now open, sir.

Ian Macpherson

Hey thanks. I had a couple of questions first, I wanted to ask about the strategy with the Cerrado acquisition if you can share your thoughts on what you will pay to stack that rig on an ongoing basis and what sort of investments you run for the eventual reactivation costs to that rig?

Anthony Argyropoulos

Well, as we have guidance for all our units that are ultimately cold stock. The cost of cold stocking is approximately $10,000. Now obviously there are some expenses associated with entering into the stocking mould, it is a phase down period if you will before you reach the $10,000 level, which is about a couple of months at about a $100,000 a day or so, or possibly lower.

To stock the cost is not that high, so it’s less than $5 million now the reactivation will depend. Another guidance we can provide is that usually when we cold stock a unit it would differ the special survey as well until reactivation. So when we reactivate, we will also perform a lot of these special survey items. So the cost will include certain issues pertaining to the reactivation and now this pertain to a special survey.

Ian Macpherson

Okay. So it’s a sort of [TBD] (Ph) depending on the time and circumstances. I guess is the answer.

Anthony Argyropoulos

Sure. But I think the point I was trying to make was it should not exceed the cost of doing a full special survey of five-years.

Ian Macpherson

Okay. Thanks and then I appreciate that much. My follow-up question was that here in the first quarter you had an extraordinarily high gross profit margin on your deferred and I wonder if you could shed any light on that. Whether that had anything special and with regards to contract termination receivables or if that was just an idiosyncratic quarter and what probably should think about the margin on your deferred revenues and costs for the balance of the year? Thank you.

Anthony Argyropoulos

I think that you are right, there is about a $60 million associated with the accounting treatment on the termination fee for the Apollo and the fact that we actually pass through the P&L the mould fee had differed so that is a one-off and going forward the termination fee in the Apollo will be recognized as incurred.

Anthony Kandylidis

Yes, also going forward on Slide 15 we have a schedule of the revenue expenses for the balance of the year.

Ian Macpherson

Yes, got that. Thanks Anthony. All right, I'll pass it over. Thanks.

Anthony Argyropoulos

Great, thank you.

Operator

Thank you very much indeed [Operator Instructions] from Seaport Global your first question comes from Mark Brown. Your line is now open, sir.

Mark Brown

Hi. I just wanted to ask along the previous question on the Cerrado, if there is any work that that is being considered for with any of your customers, may be you could shed some light in terms of what geographies you are focused marketing the rig? And I think just if there is any investment that would be needed to put into the rig, if say for example you had something lined up immediately.

Anthony Argyropoulos

Yes I think on the Cerrado, as we’ve discussed in previous calls, we have been helping the lenders in that situation by being the manager of the vessel since the summer and for us it was an opportunity in the ordinary course of business that came at a very attractive price and unexpectedly so. So there is no specific plan right now, we are marketing the rig and we will see how it goes, but we will probably end up cold stocking really, at this point.

Mark Brown

Okay, will that helpful and the other question I had is your decision earlier in the quarter to acquire - the share that dry ships had owned in ORIG. I’m just curious, why go with that use of proceeds or is that use of your cash at this time?

Anthony Argyropoulos

Mike as you know the ownerships stake of dry ships in Ocean Rig was something that had close concern among our shareholders, even with our rating agencies as a matter of fact. And there was an overhang if will concern on our stock. Dry ships went through - it is going still through a period, I would say some financial strain due to the dry bulk market recession.

And when the need additional liquidity and offer to sale there is stake, the price we felt was the right time to do it, it was very attractive price. And we believe that for a reasonable part of our cash liquidity it was a consideration of a little less than $50 million. We addressed an issue that had been around for a long period of time.

Mark Brown

Thanks, alright. I appreciate it. Thank you

Operator

Thank you very much indeed sir [Operator Instructions].

Anthony Kandylidis

Operator do we have any further question?

Operator

Yes if you will stand by please gentleman, I will be right with you.

Anthony Kandylidis

Yes. We are here.

Operator

You have a follow-up question from the line of Ian Macpherson from Simmons. Please go ahead sir.

Ian Macpherson

Thanks for hanging around for the follow-up. I had a follow-up regarding just demand prospects for next year. There have been some [hindering] (Ph) opportunities to get some long-term work in Brazil. I’m wondered if you have any update on that. How tangible that is, if you are like customers are just market testing or there is real demand possibility for term work in Brazil or else were starting next year? Thanks.

Anthony Argyropoulos

Yes I think that the market prospects for next year, as we have said in the past, do not look very good. There is a lot of price checking out there as appose to firm programs and I think it’s really early to say whether there will be employment for next year in Brazil. But there is defiantly not intangible there.

Ian Macpherson

Okay and thanks very much.

Anthony Argyropoulos

Thank you.

Anthony Kandylidis

You are welcome.

Operator

Thank you very much and there are no further questions at this time. So I shall pass the floor back to you for closing remarks.

Anthony Kandylidis

Thank you very much for participating in Ocean Rig’s first quarter results and we look forward to our next call for the second quarter. Thank you.

Operator

Thank you very much indeed gentlemen and with many thanks to our speakers today. That thus concludes the conference. Thank you all for participating. You may now disconnect.

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