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Ocean Rig’s Contracts: What They Tell Us About the Future

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Ocean Rig’s backlog

A company’s backlog is a helpful indicator of its future revenues. Ocean Rig (ORIG) has a backlog of $2.4 billion as of May 17, 2016, compared to a backlog of $4.7 billion a year ago. The ratio of the company’s backlog to its trailing 12-month (or TTM) revenue has fallen rapidly and stands at 131% compared to 252% in the same period in 2015.

This steep fall is a cause of concern and indicates that the company is relying on its older contracts for revenue. It’s not replenishing its backlog with new contracts as much as it utilizes its backlog.

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Setback in backlog

In the 1Q16 earnings conference call on May 20, 2016, Ocean Rig didn’t mention any new contracts. In January 2016, the company issued a notice that Italian oil company Eni Sp.A. had terminated its contract with the ultra-deepwater drillship Ocean Rig Olympia. Earlier, the company announced that Premier Oil terminated its contract on ultra-deepwater semi-submersible Erik Raude. Total has given notice to Ocean Rig that it’s terminating its long-term contract on the ultra-deepwater drillship Ocean Rig Apollo. These contract cancellations are a major setback to the company’s backlog. 

Contract status

Of the ten rigs Ocean Rig currently owns, seven are contracted. Of these seven, contracts on two rigs will roll off in 2016 and two more in 2017.

Comparing the backlog with peers 

Pacific Drilling’s backlog-to-TTM ratio is lower than most of the offshore drilling (IYE) companies. Transocean’s ratio is 218%. Noble (NE) and ENSCO (ESV) have ratios of 200% and 140%, respectively. Diamond Offshore’s (DO) ratio of 251% is also on the higher side.

In the next part, we’ll look at Ocean Rig’s cost savings in 1Q16.

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