Shares of offshore deepwater driller Ocean Rig UDW (ORIG) fell 25% in July, continuing a decline that started three months ago. Since the 10th of May, the company's share price has shed almost 60% of its value on a regular stream of bad news for investors, including a big stock dilution, falling oil prices, and the suspension of its dividend:
So what: There's no getting around it -- the past few months haven't given investors much to like with Ocean Rig. Shareholders have seen their ownership in the company get reduced by more than 20% after a public offering to raise cash and the use of shares to pay down debt owed to its parent company, Dryships, Inc. Furthermore, oil prices have fallen again, after peaking in the spring, and are now at the lowest they've been since the heart of the Great Recession.
Now what: This really puts Ocean Rig in an uncomfortable position. The company is highly leveraged with a lot of debt, and this creates a high level of risk, considering that the current weakness offshore drilling demand is expected to continue into potentially 2017. The driller's backlog is a mixed bag, with six of its 10 currently operating vessels under contract until sometime in 2017. In other words, 40% of the company's vessels aren't currently under contract beyond next year's third quarter.
In addition, Ocean Rig has another drillship scheduled to be delivered from construction next June, which means operating costs will increase, as will debt in order to finance the final payment to the shipyard -- all in the middle of what could be the worst year for offshore drilling demand in more than a decade.
Ocean Rig's high debt exposure, and a less-than-optimal contract backlog probably create too much risk, with so much uncertainty around a recovery in offshore drilling demand. After all, there are a lot of concerns onshore, between still-high American oil production, the likelihood of Iran contributing even more to the already oversupplied oil market, and real concerns of a weakening Chinese economy further dampening demand.
We may look back in a few years and see that Ocean Rig UDW was a steal today, but there's a lot of risk. Probably best to wait for the market to turn around before investing. You may end up paying more, but you could also avoid serious losses. The company is heavily leveraged, and business probably isn't getting better anytime soon. That's not a recipe for guaranteed returns.
