Why Ocean Rig’s large backlog supports its future MLP profits

Market Realist

Why Ocean Rig stock could double as an MLP (Part 2 of 4)

(Continued from Part 1)

Future profits are supported by a large backlog

ORIG currently operates six rigs, then one will come online in 4Q12, two more will be delivered in 1Q14, and another two in 2015, bringing the total to 11. Only one of these does not have a customer contract tied to it because it was ordered a few weeks ago. The backlog has grown from $1.6 billion in early 2012 to $5.8 billion today, which is equal to nearly five times today’s revenue. Stated differently, nearly 70% of my projected cash flows for the next three years (see the second graph) are backed by contracts from large, creditworthy E&P operators, including ConocoPhillips (COP), Eni, Lukoil (LUKOY), Petrobras (PBR), Repsol (REPYY), and Total (TOT) (see the first table). If these customers exercise extensions, then almost 80% of the forecasted cash flows are covered. Therefore, the outlook for ORIG and its expected earnings are fairly visible over the next few years regardless of the fundamentals in the general UDW market.

EBITDA should grow by 2.5 times and FCF should improve exponentially

Currently, ORIG’s six rigs are generating $400 million of annual EBITDA, but this will grow to $1 billion run-rate by 2015, when it increases its fleet to 11 because each new rig will generate $120 million of EBITDA. Over the next two years, the company will spend $1.8 billion finishing the construction of these newbuilds, then its cash flow should increase significantly. Its 11th rig will be delivered in 4Q15, and at that point, ORIG should be generating $660 million of levered FCF and $880 million of unlevered FCF. My forecast below is slightly more conservative than consensus, which I believe is because I’m using the company’s guidance of 93% utilization while it’s been achieving above 96% recently.

The Market Realist Take

The company said in its earnings call that, excluding optional periods, it’s under contract for all of 2013, 99% for 2014, 71% for 2015, and even 38% for 2016. Since early 2012, it has quadrupled its backlog and built a solid foundation for the future.

At the end of September, ORIG had free cash of approximately $501 million. Plus, it had approximately $27 million in restricted cash—which includes minimum liquidity requirements under its Bank ECA facility following delivery of the Ocean Rig Mylos. The capital structure at the end of September is robust, as evidenced by a modest 46.7% net debt-to-capitalization ratio.

Pacific Drilling (PACD), Seadrill (SDRL), Ensco (ESV), Rowan Companies (RDC),  and Transocean (RIG) are some of ORIG’s peers in the offshore drilling space.

Continue to Part 3

Browse this series on Market Realist:

Rates

View Comments (0)

Recommended for You

  • Obama to GOP: 'Stop just hating all the time'

    KANSAS CITY, Mo. (AP) — Pointing the finger at Republicans for congressional inaction, President Barack Obama chided lawmakers Wednesday for spending the waning days before their month-long summer break trying to sue him rather than addressing economic issues that could boost the middle class.

    Associated Press
  • ARGENTINE STOCKS CRASH

    Argentina's stock market is tanking after the...

    Business Insider
  • Tycoon Worth $62.9 Billion Shares Money Secret

    This billionaire investing wizard has a dead-simple system for making money you can start using today.

    AdChoicesThe Motley FoolSponsored
  • Airbus adamant no room for more talks in cancelled Japan jet deal

    Airbus on Thursday said its decision to cancel a $2.2 billion jet order from Skymark Airlines was final, rejecting the Japanese carrier's suggestion that talks were still ongoing. The European aircraft maker said this week it had informed Skymark that its purchase of six A380 superjumbos "has been…

    AFP
  • In San Francisco real estate, $1M won't buy much

    SAN FRANCISCO (AP) — San Francisco Association of Realtors President Betty Taisch has two words of advice for those who want to live here and think $1 million will buy them their dream house: Think again.

    Associated Press
  • Tesla posts 2Q loss, prepares Nevada factory site

    PALO ALTO, Calif. (AP) — Electric car maker Tesla Motors widened its loss in the second quarter as it prepared for the launch of a new SUV and started work on a massive new battery plant.

    Associated Press
  • US warns against traveling to Ebola-hit countries

    NEW YORK (AP) — U.S. health officials on Thursday warned Americans not to travel to the three West African countries hit by an outbreak of Ebola.

    Associated Press
  • Asia stocks dip on Dow drop, China data cuts loss

    HONG KONG (AP) — Most Asian stock markets dipped on Friday following a big sell-off on Wall Street but losses were limited by optimistic reports on China's economy.

    Associated Press32 mins ago
  • 4 Unusual Savings Strategies That Really Work

    It's just one of those facts of life: Saving money can be really hard. If you're trying to save and not getting ahead, it might be time to try one of these easy, everyday savings habits that will help you tighten your finances.

    U.S.News & World Report LP
  • Dental Implants: What You Should Know

    Thinking of getting dental implants? There are critical things you should know before going under the knife for the perfect smile.

    AdChoicesSymptomFindSponsored
  • What SunPower Earnings Mean for First Solar and SolarCity

    After markets close Thursday, solar panel maker SunPower will report second-quarter results. Competitors First Solar and SolarCity are scheduled to report results next week.

    24/7 Wall St.
  • Play

    Why Do Millennials Prefer Cash to Investing Money?

    In the last year, the S&P 500 delivered 17% and cash investments delivered 1%. Which would you rather have? In a Bankrate study, millennials said they'd rather have the cash. The Mutual Fund Store's Senior Vice President of Investments Andy Smith joins Simon Constable on the News Hub to discuss.…

    WSJ Live
  • Wisconsin Supreme Court upholds 2011 union law

    MADISON, Wis. (AP) — The fight over Wisconsin Gov. Scott Walker's signature policy achievement, a law effectively ending collective bargaining for most public employees, ended Thursday with the state Supreme Court declaring it to be constitutional.

    Associated Press
  • Sanctions will damage Russia if not lifted quickly

    MOSCOW (AP) — U.S. and European sanctions against Russia's energy and finance sectors are strong enough to cause deep, long-lasting damage within months unless Moscow persuades the West to repeal them by withdrawing support for Ukrainian insurgents.

    Associated Press
  • Adidas shares plunge 13% after Russia warning

    Adidas shares tanked more than 13 percent after it cut its profit targets for 2014, warning "tensions" in Russia would hit its bottom line.

    CNBC
  • Panasonic, Tesla to build giant battery plant in US

    Japanese electronics giant Panasonic and US electric vehicle maker Tesla Motors said Thursday they will jointly build and operate a huge lithium ion battery plant known as the Gigafactory. Under the deal, Tesla will run the operations at the proposed US-based plant, while its Japanese partner will…

    AFP
  • New Prostate Supplement Takes CVS by Storm

    Are you sick and tired of frequent bathrooms trips that wake you up at night and dominate your day? There's a new product that helps.

    AdChoicesPeak LifeSponsored
  • Why You Should Prepare for the Next Bear Market Now

    The stock market is going gangbusters these days, with the S&P 500 close to surpassing 2,000 points. While the index may never fall back to that level, bear markets will one day hit us hard again. It's a good idea to develop a plan for the next bear market now, while your asset values aren't free…

    U.S.News & World Report LP
  • Play

    Tesla's Earnings: What to Watch For

    Electric-car maker Tesla is scheduled to be released after the bell Thursday, and Mike Ramsey joins MoneyBeat with Paul Vigna to preview the results.

    WSJ Live
  • Bank of America ordered to pay $1.27 billion for 'Hustle' fraud

    By Jonathan Stempel NEW YORK (Reuters) - A federal judge on Wednesday ordered Bank of America Corp to pay a $1.27 billion penalty for fraud over shoddy mortgages sold by the former Countrywide Financial Corp. U.S. District Judge Jed Rakoff in Manhattan ruled after a jury last October found the…

    Reuters
  • 5 Little-Known Ways to Boost Your Retirement Savings

    Saving for retirement is no easy task. Fortunately, we have several tools and strategies that can help us reach our retirement goals. Maintain your asset allocation. When you begin investing you typically select an asset allocation that suits your risk tolerance and investment goals.

    U.S.News & World Report LP
  • Alcatel-Lucent cuts losses but shares slump

    Telecommunication equipment group Alcatel-Lucent said Thursday it cut net losses by more than half in the second quarter as it battles to rebuild after years of setbacks. Alcatel-Lucent said its quarterly net loss was 298 million euros ($399 million), down from 885 million euros for the same period…

    AFP
  • Can a Repair Shop I Didn't Use Send Me to Collections?

    Are you obligated to pay for car parts that a repair shop ordered after they gave you an estimate? And can they send you to a debt collector if you don't pay?

    Credit.com
  • 2x as Powerful as Glucosamine Plus Chondroitin

    Shocking 10 second joint relief trick that's twice as powerful as glucosamine plus chondroitin.

    AdChoicesBeneflexSponsored