Ocean Rig UDW Inc. OCRG NS
July 24, 2011 - 11:27pm EST by
2011 2012
Price: 97.00 EPS $0.54 $1.02
Shares Out. (in M): 132 P/E 33.0x 17.0x
Market Cap (in $M): 2,365 P/FCF 0.0x 6x
Net Debt (in $M): 200 EBIT 201 385
TEV ($): 2,565 TEV/EBIT 12.7x 6.6x

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Ocean Rig UDW is undiscovered with lots of catalysts ahead.  This pure-play, ultra-deep water (UDW) driller with a brand new fleet is a split-off from Dryships that quietly went public in December 2010 via a US$500m equity raise at US$17.50/share with simultaneous listing on the Norway OTC under ticker OCRG NS.  
2 UDW semis
4 UDW drillships
The 2 semis and 2 drillships are working at high contracted day rates with major oil companies.  The other two drillships will be deployed with similarly strong contracts upon deliveries from Samsung's yard scheduled for July, and October 2011.  There are options on four additional UDW drillships with the same Samsung yard (sister ships to those currently under construction) for delivery in 2013. 
97 NOK   (USD/NOK 5.4 = USD$17.96)  figures from here forward in USD
131.7m shares out
$2365m Market Cap
$1100m Debt...  net debt will be $1800m at year end with Deliveries
$900m year end 2011 cash... 
Please ignore the current $2565m EV
$4165m Adjusted EV upon drawing the credit line and spending the cash on hand for final yard payments by year end 2011
Blended average fleet dayrate is over $500k per day per rig (with creditworthy oil majors as customers).  Cash costs of 150k per day lead to $350k per day of profit per rig.  Figure in $75m of annual corporate overhead:
275M 2010 EBITDA with 2 rigs working... 15x
375M 2011 EBITDA as the ships arrive...  11x
650M+ 2012 EBITDA with full six ships...  6.4x EV/EBITDA  &  694m EV per rig... 
Comps:        OCRG   SDRL    RIG
EV/EBITDA     6.4x     12x      8x
EV/RIG         694m  1100m   900m (taking out a fair value estimate for jackups)
Dayrates - will be on the rise.  In the ultra deep water, there is a shortage of rigs.  Currently there are just six uncontracted units intentionally held on the spot market for premium prices, yet there are at least 40 being sought for UDW projects.  The yards can produce up to 30 a year but most of this supply is already contracted for the next few years.  Availablity will only get tighter next year so I expect dayrates to move up toward 600k/day as more of the incremental oil and gas this world needs will inceasingly be coming from the UDW.
Dividends -  If they shut down the spending program on newbuilds, there will be capacity to pay a huge dividend of over 20%... I don't think they'll shut it down and in fact will likely be an acquirer (Aker Drilling - AKD NO, maybe?).  Depending on their acquisition program they will institute a dividend in 2012 of 1-2% if the program is robust, and likely 7% if no transactions are happening.
Deliveries - By year end they'll have all six rigs producing cash at average dayrates over $500k/day.  That cash flow de-risks this company and puts it on track for rapid deleveraging. 
US Listing - In August ticker ORIG will be listed in the US.  Currently on the Norway OTC, it trades like private equity with wide bid/ask spreads and sporadic trading.  The US listing will bring sell side coverage and a whole new class of investors.
State of the Art - These are brand new, latest technology, dual derrick, extra mud and pipe handling capacity, top of the line rigs with enhanced safety features.  In the post Macondo world, oil majors are willing to pay a premium for the new rigs and don't want to risk reputation by being cost versus safety conscious using older rigs.
Managemet - Chmn of DRYS & OCRG NS, George Economou, gets a bad rap, but has been a good manager.  Some are uncomfortable with his family's dealings in the space as a large shipper and owner of Cardiff, but he hasn't done anything nefarious.  Investors were tough on him when DRYS went public because the ships were sold into the company from a private co controlled by his sister.  With hindsight the sale prices of the ships turned out to be right in line with market.  Later, there were some ships sold back and forth between Cardiff and DRYS with put back features if they didn't get the assumed dayrates... when they came back, a family owned ship brokerage charged commish both ways... and some investors went nuts over this... In defense of management, it was rather small relative dollars and the brokerage employees had contractual rights to their commissions.
DRYS - Dryships owns 78% of Ocean Rig so they have $1.845B worth of Ocean Rig stock and a market cap of only $1.5B implying negative value for their drybulk business.  Drybulk dayrates are currently very low due to a trifecta of mishap.  Heavy flooding in Austrailia this spring affected iron ore and coal volumes dramatically, then the Japan earthquake & Sunami further affected volumes of grains and iron ore, and all this happened just as there were record newbuild deliveries.  Drybulk spot dayrates are now around $12,500 per day (for both Capesize and Panamax) which is below cash costs to operate let alone the mandatory debt amortization payments due... and these rates are expected to hold through the drybulk oversupply well into 2012.  There will be bankruptcies in the drybulk space, though DRYS won't be one of them thanks to some long term contracts still around $25k/day and their Ocean Rig stock that will be uploading dividends next year.  Meantime DRYS is selling off some of the weaker, uncontracted parts of the fleet... last week they brought in $75m for four vessels (2 capes, 2 panamax).  Is DRYS  a cheaper way into OCRG NS?... technically yes, but no shortage thorny problems come with it.
PBR Factor - Petrobras with its $225B capex program over 5 years to develop the pre-salt offshore could turn the UDW industry on its ear.  They've said they are seeking up to a dozen rigs currently.  If they bite, they could use virtually all of this year's and next year's supply.  At some point, procurement managers at the oil majors stop worrying about overpaying and start to worry about availability... that could be the catalyst for dayrates at $600k/day.
Once Ocean Rig has all it's deliveries, has listed in the US and is enjoying a broader investor base and sell side coverage, has instituted a dividend, and sees higher dayrates for it's emerging newbuilds, it could quite conceivably trade in line with Seadrill (SDRL) at $1100 per rig which would put the stock in the high NOK 180s from sub NOK 100 currently or US $36 from sub $20 now.


- Cash flow increases as newbuilds are delivered in July, & October
- Improved trading liquidity:  Moving listing from Norway OTC to a US listing in August.  This will allow a whole new class of investors to own it, and will attract sell side coverage.  This path is similar to the route SDRL took.
- Instituting a dividend in 2012... could be low depending on how they exercise their newbuild options program and acquisition activity.  But will be north of 7% eventually.
- News of new contracts taking up the limited supply of UDW assets plus Petrobras factor.
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