Ocean Rig: No Bond Buybacks, Stock Will Crash

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About: Ocean Rig UDW Inc. (ORIG)
by: Vladimir Zernov
Summary

Ocean Rig reports 3Q results.

No bond buybacks.

Bankruptcy remains a possibility.

Ocean Rig (NYSE: ORIG) has just released its third-quarter results. Several days ago, I laid out my thoughts on the key topics of this earnings release, which included bond buybacks, restructuring talks, Apollo prepayment, Leiv Eiriksson status and Ocean Rig Raude dispute. Let's go through these topics one by one.

1. The most important point of the earnings report - there were no bond buybacks. I think this topic is closed for good and conspiracy theories saying that Ocean Rig's CEO George Economou deliberately including words about bankruptcy back in August to buy bonds cheaply will vanish from discussions. The absence of bond buybacks is a huge blow to Ocean Rig shares, which moved on hope rather than fundamentals.

2. Ocean Rig reiterated words on restructuring: "The company continues to explore and consider various strategic alternatives with its financial and legal advisors, which may include a possible restructuring under U.S. bankruptcy laws or another jurisdiction". This is another blow for a stock, as some investors believe that the recent upside in Ocean Rig shares meant a change of fate for Ocean Rig. It turns out nothing has changed, which was clearly expected as the deepwater segment remains in deep trouble.

3. There was nothing on Apollo prepayment in the report. Most likely, we will know more from the earnings call. Leiv Eiriksson got a one-well extension and will work until the end of March 2017.

4. Ocean Rig mentioned that it will try to secure work for Leiv Eirksson for the full year 2017. This is good news, but it will be unnoticed by the stock given the pressure from the lack of bond buybacks and the possibility of bankruptcy.

5. Nothing on the Ocean Rig Raude dispute. At the same time, the company mentioned that it received $23.4 million from Total (NYSE: TOT) in connection with the arbitration proceedings for the termination of the Ocean Rig Olympia contract.

The absence of bond buybacks and reiteration of bankruptcy possibility are such big news that most traders won't even look at the actual earnings numbers, which were not great, as Ocean Rig missed estimates on both earnings and revenue.

I expect that Ocean Rig shares will find themselves under serious pressure for several reasons. First, there were no positive catalysts in the report except for a small job for Leiv Eiriksson.

Second, Ocean Rig shares attracted many speculators on their way up and some of those speculators did not even know that the company was in such big trouble and that bankruptcy was a possibility. These traders will jump ship as soon as the trading day starts.

Third, the bond buyback theory is finally crushed and it is clear that Ocean Rig will be negotiating with creditors rather than buying its bonds at a discount in an open market.

I reiterate my bearish views on Ocean Rig. The stock will continue to be volatile and may present opportunities to go long like it did before, but the final outcome won't be pleasant for common shareholders.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in ORIG over 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.