Ocean Rig Was Up 90% On No News. Should We Be Surprised?

Summary

• On March 28, 2017, ORIG filed for Chapter 15 bankruptcy protection in the USA, leaving nearly nothing to common shareholders.
• The question, as always, is what will be the share value after the restructuring is completed. This is often a problem without any solution.
• Trading the stock is now extremely risky, but if you can grasp the best timing, the game can turn out very profitable.

Semisubmersible Eirik Raude - Ocean Rig UDW (NASDAQ:ORIG)

Investment Thesis:

It is hardly a secret how poorly the offshore drilling industry has done recently. Drillers are struggling to survive while waiting for a recovery that seems to slip away due to a stubborn low oil price environment, which is not enough to push oil majors to invest again in exploration CapEx.

While the market is not at equilibrium, it is far from being dead. I have noticed some tendering activities the past few months, especially in the jack-up segment. Recently, the floaters segment has appeared to move a little as well.

However, for a few offshore drillers such as Ocean Rig, talking about a potential and elusive recovery is not going to help. On March 28, 2017, the company filed for Chapter 15 bankruptcy protection in the USA.

In a filing with the U.S. Bankruptcy Court in New York, Ocean Rig UDW President Antonios Kandylidis said the company had reached an agreement with a group of lenders to convert $3.7 billion of debt into new equity.

Due to the uncertainty attached to the situation and the high level of volatility the stock will experience until the company emerges from bankruptcy, I recommend avoiding the stock and only day trade on special occasions.

Today's surprised rally on no news.

Let's have a look at the chart starting March 28, 2017, when the bankruptcy was announced.

ORIG was about 0.50 and lost about 75% of its value in three months and a half. The market was undecided about the value of the stock and traded until mid-May just below 0.30. Then, the stock started to weaken until yesterday with a low around 0.12.

The fall was not a surprise because the news on March 28 indicated clearly:

... If the Schemes are sanctioned, the existing shareholders of the Company will be diluted to an insignificant amount of the post-restructuring equity of the Company.

Obviously, the common shareholders are going to be diluted into oblivion, because the common shareholders will get an insignificant stake in the new stock. Another SA contributor, M. Vladimir Zernov indicated in April.

The shareholder meeting approved the increase in the company's authorized share capital to ONE TRILLION (1,000,000,000,000) common shares. As of December 31, 2016, the company had roughly 161 million common shares with 78 million shares classified as treasury stock. Thus, the company may issue 6211 times more stock than it has now.

Assuming a total share outstanding after the restructuring of about 100 billion shares (10% of the shares authorized), shareholders who own about 83 million shares now, will represent 0.00083% of the new company.

The question, as always, is what will be the share value after the restructuring is completed? This is often a problem without any solution and in general, the street value gives a fair idea of what to expect.

Yes, of course, we could eventually calculate a value based on the rig fleet estimated on March 29, 2017.

Ocean Rig currently owns a fleet of 14 rigs, which consists of nine modern drillships built at Samsung and two semi-submersible drilling rigs built between 2002 and 2001, with three drillships under construction.

According to William Bennett, a senior analyst at VesselsValue, the driller’s live fleet – 11 rigs – is worth $1.64 billion. Out of the 11 active rigs, five are without a contract.

As for the three drillships still on order at Samsung, Bennett says their worth is around $1.24 billion.

Commenting on the newbuilds status, he said: “It is quite possible that these drillships are delayed as has been the case for newbuildings across the offshore industry.”

The combined values of the live fleet and the newbuilds gives Ocean Rig’s fleet a value of around $2.89 billion. For comparison, back in January 2014 and before the downturn, when Ocean Rig had only ten rigs, the value of its entire fleet was $7.2 billion.

But, the value of the fleet is only one element among many needed to figure out a "fair value".

Furthermore, in these particular circumstances the stock is "played" mainly by day traders and so, volatility is very high. This is what we are experiencing today with a volume four times higher than the 1-month average. This is always expected and comes as a complete surprise and no news to justify such sudden rally.

Conclusion:

This is a perfect example of what can happen to a company filing for bankruptcy. The value of the stock is unpredictable and fluctuates widely depending on "rumors" or just simple manipulation. Trading the stock is now extremely risky, but if you can grasp the best timing, the game can turn out very profitable.

It is tempting to compare this situation to Seadrill (SDRL) or Pacific Drilling (PACD) which are about to unveil a restructuring plan as well. I expect the same volatility in the next few months.

Important note: Do not forget to follow me on ORIG and other offshore drillers. Thank you for your support.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s 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.

I day trade ORIG on special occasions.