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Ocean Rig’s View of the Market, Bankruptcy Warning

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Conference call

In its 2Q16 conference call, Ocean Rig’s (ORIG) management gave insights on offshore drilling’s (IYE) demand side, supply side, and its own plans to deal with the distressed market conditions.

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Demand side

Some of the important points that Ocean Rig mentioned about offshore drilling’s demand side are as follows:

  • As oil prices slumped due to oversupply, E&P (exploration and production) companies have started making big budget cuts, which will mean that more contracts are susceptible to termination.
  • According to the company’s estimates, there have been 48 contract terminations for floaters, while 34 units have been built since 1997.
  • Tendering activity has remained low and is limited to smaller projects in 2016.

Supply Side

Ocean Rig mentioned the following about offshore drilling’s supply side:

  • As market conditions continue to deteriorate, 59 rigs have already been scrapped, and around 125 rigs have either been warm or cold stacked.
  • Contracts on about 68 rigs are expected to roll off in the next 12 months. These rigs do not have any immediate work prospects.
  • The supply side is also pressurized by heavy order booking, with 26 newbuilds entering the market—22 of which are uncontracted.

Management commentary

With pressurized supply and demand conditions in the offshore drilling market, the company does not see any recovery before 2020. The company mentioned that it will need to amend or exchange its debt obligations for new debt or equity securities.

The company also stated that not all debt holders will have full recovery of their investments and mentioned its possible reorganization under US bankruptcy laws. The negative outlook of the market and its bankruptcy warning, meanwhile, helped pull down the stock’s price.

This bleak outlook of offshore drilling is not only bad news for Ocean Rig but also for Diamond Offshore Drilling (DO), Rowan Companies (RDC), Noble (NE), Seadrill (SDRL), Ensco (ESV), and Atwood Oceanics (ATW).

Now let’s look at Ocean Rig’s revenues.

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