Ocean Rig: What Was So Great In Q1 Report?

| About: Ocean Rig (ORIG)

Summary

Ocean Rig posts an earnings beat and shares rally.

I go through my pre-earnings checklist.

Did an upside catalyst emerge or the move is just speculation?

Prior to Ocean Rig's (NYSE:ORIG) earnings, I published a checklist of important points regarding the company's earnings release and the subsequent earnings call. The company's results are now online and the conference call was held, so we can go through the points one by one and then I will share my general views on the report and on the stock trading action.

Checklist

1. The Cerrado purchase. News on Cerrado is a big disappointment to those who thought that Ocean Rig had concrete ideas for this drillship.

I expected that the rig was purchased as a pure speculation. It turned out that the company had no specific plan for Cerrado and just picked it at a price which looked like a bargain. As a result, the rig will most likely be cold stacked.

Ocean Rig stated that cold stacking cost $10,000 per day, so Cerrado will cost $3.65 million per year after the company spends a couple of months contributing $100,000 per day as the ship is prepared for cold stacking.

The stacking cost is not dramatic for Ocean Rig and won't have any meaningful impact on the company's finances. The reactivation cost (including the special five-year survey) is another question, but it will be addressed at least several years from now.

From a shorter-term point of view, the company pulled $65 million of liquidity and used it to have an asset that will contribute to expenses at least for several years. This is absolutely not a problem if you expect a robust recovery in oil prices and a corresponding recovery in the offshore drilling space. If you believe that the path to recovery will be difficult, the purchase looks like a very aggressive and potentially dangerous move.

2. Bond repurchases. No news on bond repurchases. This looks rather strange given the fact that Ocean Rig has now $700 million of cash and a maturity to meet in 2017. Probably, the plan is to make an offer for all bondholders closer to the maturity date. Ocean Rig's current liquidity situation provides it with time for this maneuver.

3. The fate of Ocean Rig held by the subsidiary. The company stated that it purchased shares from DryShips (NYSE: DRYS) because DryShips' financial situation was worrisome. Shares have not been canceled and, in my view, will never be cancelled.

Ocean Rig Investments may ultimately sell the shares at a profit and contribute cash to the parent company if it needs it, or the shares will quietly remain in Ocean Rig Investments' possession with an uncertain outcome. At this point, both options are possible. I view the fact that the shares have not been cancelled as a clear intention to hold them in Ocean Rig Investments without selling.

4. Further investments by Ocean Rig Investments. No intention to proceed with purchases of bonds or drillships was explicitly indicated, but this of course does not rule out any possibilities.

5. Ongoing disputes. No information was provided.

6. Prepayment of the Apollo loan. The difference between the cash at the end of the first quarter ($828 million) and the cash at the moment of earnings call ($700 million) indicates that the company likely made the prepayment of about $150 million, which was in line with expectations.

7. Ocean Rig Santorini. This topic was not touched during the earnings call, but clearly it will emerge later this year.

My take

The stock market paid attention to the big headline beat and the stock increased significantly. Clearly, the headline beat was mainly caused by the accounting treatment of the termination fee of the Apollo, but the lack of concrete bad news together with oil near $50 per barrel served as upside catalysts.

At the moment of writing this article, more than 12 million shares of Ocean Rig exchanged hands. Given the tiny float of the company, this indicated that the shares are firmly in the hands of traders. Thus, we can expect outsized moves both on the long and short side, with technicals serving as a leading catalyst for the moves.

In essence, the earnings call provided few answers. The main takeaway is that no miracles happened and Cerrado will likely be cold stacked for several years. The other important thing is that shares of Ocean Rig, which are currently held by Ocean Rig Investments, will not be cancelled. This fact opens the door for various speculations. I view this as a warning sign, although there is a possibility that the company will ultimately sell these shares and raise cash if necessary.

As we head into the summer, oil price fluctuations will have a great influence on Ocean Rig shares. If oil fails to stabilize over $50, the company's shares will resume their slide. In case of oil rally, momentum players will certainly push shares of Ocean Rig higher. Longer-term, I'm still skeptical on Ocean Rig.

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.