Ocean Rig UDW Inc. (NASDAQ:ORIG) is a micro-cap oil and gas play that has been extremely active in recent sessions. Even though the deepwater drilling market remains extremely depressed, one of the players with staying power and intriguing future prospects is Ocean Rig UDW Inc. (NASDAQ:ORIG), an operator of semi-submersible oil rigs and ultra deepwater (UDW) drillships.
The company is an international offshore drilling contractor providing oilfield services for offshore oil and gas exploration, development and production drilling, and specializing in the ultra-deepwater and harsh-environment segment of the offshore drilling industry
Ocean Rig UDW Inc. (NASDAQ:ORIG) stock price fell off a cliff after it announced earnings on August 12, and has been recovering since. On August 11, shares of ORIG ended the day trading at $2.16 – The next day, shares fell all the way to $0.83. Over the past three months, shares have been steadily moving upward, to a current level of $1.42. Over the most recent 52-week period, shares of the company have traded as low as $0.66 and as high as $3.38. Shares are currently trading in a range of $1.53-$1.90, and the total market capitalization of the company is currently $117M.
The big picture of course, is that the entire offshore drilling market has been in decline with falling oil prices. Quite simply, demand for the types of rigs and drillships supplied by Ocean Rig has collapsed. At the same time, supply continues to grow, even with contract cancellations. This has led to a severe imbalance in supply and demand within the marketplace. Moreover, even if the price of oil recovers in the near term, the one sector that’s likely to see growth is the shallow water space. It’s only later that the deepwater drillers will see any kind of action.
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Ocean Rig’s management indicated as much in the latest earnings release on August 12, which is what may have spooked investors. The company pointed to a “grossly oversupplied market” and provided some guidance on the company’s cancelled, suspended, and postponed contracts. For example, a contract to deliver 3 drillships to Samsung Heavy Industries has been postponed.
Obviously, if the market is experiencing difficulties and orders are drying up, ORIG has to be prepared to outlast the bad times. And that’s exactly what the company appears to be doing. In the 2Q 2016 earnings release, ORIG outlined some of the steps that it was taking to hunker down until the storm passes. The goal is to boost liquidity and de-lever the capital structure. That could be bad news for debt holders, since the company specifically mentioned amending or exchanging debt obligations, or in a worst-case scenario, filing for bankruptcy reorganization.
To get a sense of where ORIG is headed, it’s important to understand how ORIG fares against its peers that also provide contract oilfield services for offshore oil and gas exploration. On October 27, Zacks Investment Research reiterated a “strong buy” on the company. The company’s financial condition is less troublesome than it appears to be at first glance.
Barchart.com also sees a short term upside in ORIG. The Barchart Technical Opinion rating is a 64% Buy with a Strengthening short term outlook on maintaining the current direction. Longer term, the trend strength is Average. Long term indicators mostly agree with the trend.
The consensus is that the company offers more upside potential than downside risk. That could account for the company’s rebound from those August lows. The company has enough liquidity to meet all its obligations through 2018, has more attractive multiples (Price/Earnings, Price/Book) than its peers, and only has its biggest debt coming due in 2021. Analysts also point to a strong management team that recognizes the risks inherent in the UDW market.
Moreover, ORIG has a relatively young and technologically advanced fleet. The company operates 6th and 7th generation UDW drillships and 5th generation semi-submersible rigs. There’s also a strong order backlog at Ocean Rig, so when the market does turn around, Ocean Rig will be well-positioned to benefit from rising oil prices. Without any sharp move in oil prices, the focus will be on additional steps that Ocean Rig takes to strengthen its balance sheet and reduce its overall debt burden. For more news on ORIG and other fast-moving penny stocks, please subscribe to OracleDispatch.com now.