Is Ocean Rig Undervalued?

Aug. 30, 2018 3:13 PM ETOcean Rig UDW Inc. (ORIG)38 Comments
Vladimir Zernov profile picture
Vladimir Zernov
16.12K Followers

Summary

  • At first glance, Ocean Rig trades at a discount.
  • However, the uncertainty regarding the reactivation of its cold stacked drillships makes the discount appropriate.
  • The only near-term catalyst that can take the shares past the $30 resistance level is an oil price rally above $80.

Ocean Rig (NASDAQ:ORIG) has been trading in a wide $23-30 range since the company's exit from bankruptcy. Typically, such situations present two main opportunities for those willing to bet on the company's stock: a buy near the low end of the range (a value buy) and a buy on the breakout of the range (a momentum buy). Such ideas work well when they are supported by fundamentals, and Ocean Rig's second-quarter report in the first half of August gave traders and investors a chance to evaluate fresh information on the fundamental state of the company.

Let's start with the key changes from the first-quarter report. The company has further paid down its debt, which now stands at $350 million. After this move, Ocean Rig has no maturities until 2024. Cash has slightly decreased from $749 million to $719 million, but the cash cushion (obtained with the help of restructuring) remains very solid. Backlog decreased from $822 million to $743 million as Ocean Rig continues to work through the high-margin backlog provided by its drillship Ocean Rig Skyros. The backlog will continue to decline for the time being as the company burns through the high-margin backlog and the market does not offer the opportunity to fully replace the lost backlog. However, it is not a problem in the near-to-medium term because the company has sufficient liquidity and the next maturity is far away.

Under these circumstances, the attention turns to the company's valuation. Bassoe Offshore values Ocean Rig's fleet at $1.9-2.1 billion. The net cash position is $370 million. Given the company's market capitalization of $2.5 billion, the net cash position and the high end of the fleet valuation is already covering it, with high-margin backlog being a pleasant bonus. So, if you believe that the company's fleet valuation is about $2.1 billion, Ocean Rig is undervalued right now.

This article was written by

Vladimir Zernov profile picture
16.12K Followers
I'm a trader who trades both short-term and long-term. I started my career as a day-trader for a trading firm, but then turned to longer time frames and went on my own to manage my portfolio. I use technical analysis as well as fundamental analysis in my research.

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 any of the above-mentioned stocks.

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