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.