ORIG - Ocean Rig UDW

[Myth465]

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/95109

 

There is also a good company presentation and sum zero write up. I think as drys sells out and as the new builds are put to work the stock will rise.

Its under book value, and book appears to be real assets. If the company converts to an MLP and eventually trades down to a 4% yield like other MLPs or REITs then we could have a real runner.

 

I have a buy order waiting to be filled. This replaces ROICW for me.

[ItsAValueTrap]

Have you looked into the history of Dryships?

 

1- The CEO (George Economou) is unethical.

2- He's also smart.  He understands how to arbitrage the public markets.  I don't think you want to be on the other side of his trades.

3- The maritime industry is very cyclical.

[HJ]

Have you looked into the history of Dryships?

 

1- The CEO (George Economou) is unethical.

2- He's also smart.  He understands how to arbitrage the public markets.  I don't think you want to be on the other side of his trades.

3- The maritime industry is very cyclical.

 

Totally agree on 1 and 2.  It also looks like they built a lot of their ships at pretty inflated costs, so essentially the same equipment could be on their books for 10-15% more than their competitors.  This very much deserve to trade at a discount. 

 

Compared with Awilco, it's also much more of a longer term bet on where day rates will be as opposed to the next 2-3 years.

 

I disagree somewhat on 3.  Offshore drilling is quite a different animal from general maritime transportation industry.  Cyclical still, but it's been quite the growth industry from the mid 90's on.  How can it not be with oil going from the teens to 100. 

 

The whole sector is a little bit rich at the moment, but if oil ever pulls back to the 80's, I'm going with Diamond Offshore in this business.

 

 

[Myth465]

Have you looked into the history of Dryships?

 

1- The CEO (George Economou) is unethical.

2- He's also smart.  He understands how to arbitrage the public markets.  I don't think you want to be on the other side of his trades.

3- The maritime industry is very cyclical.

 

I am vaguely aware of dryships.

I like ORIG because its his only game in town, he has severed some of the ties with Dryships by eliminating the cross guarantees, apart from some management fees. He has to keep ORIG trading high / get it higher for the sake of his wealth and dryships. He is right on the public market arbitrage for now, and the hard book value protects us should the markets move away from chasing yield.

 

I seem to be drawn to unethical management (SD), but I like that the company is doing fine, and has many levers to pull. This is right at the end of a huge build-out with huge cash flow coming in the next year (similar to ESV 2 years ago which worked out well for me). We have a forced seller, with a huge overhang similar to AIG. The business is doing great, the business plan is great, and the backlog and contracts protect us for 2 years.

 

Awilco - Is simply a mini Diamond Offshore (from the early 2000s) they are in run off, and long term I dont see there business model working. Basically drill with 2 old rigs, and payout the cash earned. Its not a bad idea, and they will be revalued given that yield is being chased in this market, but I simple dont see how its a viable business strategy long term. Also with 2 ships, there just isnt alot of room for error.

 

Diamond Offshore - They missed the boat and are now playing catch up, they were paying out cash when they should have been buying new rigs years ago. ESV is my favorite in this space, but they are a bit rich. DO will do well, but I dont really like Management or the Tisches to be honest. They arent hungry enough...

 

ORIG is pretty cheap selling below book value with a huge backlog. If they pull off the MLP and manage to trade at a 7.5% yield then things get very interesting.

[ItsAValueTrap]

This I don't understand.

 

1- Why is everybody on this board so concerned with Awilco having only 2 ships?

Why is everybody so concerned that some freak accident will happen to either of their ships?

 

When you drive to work, you can die in a car accident.  When we drill for oil, people can die in accidents like Deepwater Horizon.  But it doesn't make sense to overestimate the risks and the downside in my opinion.

 

2- Why would it make sense to value these companies based on yield, P/E, or book value?

 

Clearly these vessels have a private market value.  Clearly you shouldn't overpay for the private market value of these assets (which fluctuates a lot).

[Myth465]

Here is my 2 cents.

Its something that has always bothered me in investing.

I was looking at rolling up houses in Houston during the recession, and my biggest fear was having 1-2 houses with a crap tenant.

 

I figured at 5-10 houses, the others protected me against disaster.

Transocean was able to survive DWH, AWILCO would have been bankrupt.

 

AWILCO is cheap and will do well. I have done quite well in ROIC and am a big fan, of plays which have revaluing yield.

I just think ORIG will do well as well, and has a bit better downside protection. I also dont like old rigs.

 

ORIG was a bit late to the cycle but has the build in protection. AWILCO is milking things and will do well with yield, and will likely be revalued up.

Planes crash, rigs blow up, engines fail, houses get hit with hurricanes. I would rather have a business based on several assets than one or two.

 

I may buy a sliver of AWILCO but could never put alot of money in it due to this risk. Thats not saying much, I have lost money with companies with alot of assets.

 

ItsAValueTrap - I always enjoy your posts, adds something to think about.

[HJ]

 

Awilco - Is simply a mini Diamond Offshore (from the early 2000s) they are in run off, and long term I dont see there business model working. Basically drill with 2 old rigs, and payout the cash earned. Its not a bad idea, and they will be revalued given that yield is being chased in this market, but I simple dont see how its a viable business strategy long term. Also with 2 ships, there just isnt alot of room for error.

 

Diamond Offshore - They missed the boat and are now playing catch up, they were paying out cash when they should have been buying new rigs years ago. ESV is my favorite in this space, but they are a bit rich. DO will do well, but I dont really like Management or the Tisches to be honest. They arent hungry enough...

 

ORIG is pretty cheap selling below book value with a huge backlog. If they pull off the MLP and manage to trade at a 7.5% yield then things get very interesting.

 

Awilco looks like a run off for now, but I remember CNOOC buying out Awilco offshore several years ago.  I'm thinking their corporate parent may do something with them / to them in due course.  For now they are just milking it for what they can.

 

I get your feel that DO is not hungry enough.  They did miss the boat quite a bit compared with the others.  But I thought they are still doing OK.  They did put out $1 billion in 2009 from the ship yard auctions.  I'm not quite as critical on the Tisches.  They don't have the blood of a sea going driller.  Considering how conservative they are, putting out $1 billion for a $4 billion tangible equity company in one shot is quite a lot already.  And I feel that people are a bit overly concerned for the long term prospects of those mid water floaters (somewhat like they do with Awilco). 

 

On ESV, I didn't like them paying the premium that they did for Pride, a good chunk of it in their own stock too, which I felt at the time was pretty cheap, only 1 year removed from Deep Horizon.  I'm not quite sure what to make of Dan Rabun.  I was under the impression that the 8500 series build program was in motion before he joined.  I associate him with redomicile and Pride, which I'm not convinced if it added much other than making the empire bigger, certainly not when paid with a pretty cheap stock.  If you are going to play white knight to help Pride fend off Seadrill, shouldn't it have been a much better deal?  Seadrill has a chart on their presentation showing the new build construction cost over time.  That spike in '07-'08 was quite pronounced, and that was a decent chunk of what was on Pride's book.  They paid another $3 billion good will on top of that.  They needed a good 3-4 years of earnings to earn that back on a per share basis.  I think it'll ultimately work out OK, but felt a bit hurt.

 

 

[Myth465]

Dan has mostly kept a good thing going, interesting that I believe he came over from the legal side, I think he was former legal counsel. The deal for pride was empire building, but I still think ESV is the best run operator in the space. I really liked the 8500 new build, and like the similar parts / design / use of spares / and avoidance of bells and whistles.

 

I see similar things with ORIG, albeit at a higher cost and with bells and whistles (harsh environment rigs). I have been watching Loews for years and they never seem to do anything. DO is doing alright, I just dont like the age of the fleet. They are modernizing, but I dont think the overhang of the fleet will go away anytime soon. Investors seem to like new fleets not cash cows.

 

HJ will you buy Awilco.

[Myth465]

Also HJ you bring up an interesting point regarding the cost of the drillships.

The costs are higher then the $500-$600k I remember seeing at ESV and DO, but the day rates are also significantly higher.

 

Is it just time and tightness of the market, or could the 7th gen rigs cost more and generate more income. Its clear there is some overpayment with the 7th gen, costing less than the 6th gen, but how much is the questions. The IRRs look good, but you make an interesting point regarding BV.

[HJ]

Here's the Seadrill presentation that I mentioned.  On page 11 of that presentation, they showed the cost of a generic new build.  I'm not sure it's for the same class of equipment, or exactly how it translates on to everybody's balance sheet, but it gives a sense of how out of wack it was for a brief period in time.  A significant cost of the construction is steel afterall.  This is part of why I'm not that hard on the Tisches as well, since if you missed it in '06, the sticker shock was quite dramatic.  It is afterall, 30 year equipment you are buying.

 

http://www.seadrill.com/stream_file.asp?iEntityId=1483

 

By the way, in Seadrill's 20-F, they also list among their fleets are a series of new builds out of Dalian shipyards for 2015 delivery jack up rigs with a cost of $230MM, which sounded pretty low, but maybe they have different specs. 

 

The 8500 series had costs of approximately 550MM each.  ESV also seemed to have a pretty solid relationship with KFELs, earlier transactions have seen KFELs actually owning part of the rigs and essentially financing the build, but ESV subsequently buying them out more or less at cost.  I suspect for most of 2010-2011 deliveries, substantially similar equipment is on other's books for 10-20% more plus capitalized interests.

 

On the day rate difference betwen Gen 6 and 7, I actually haven't done a side by side comparison.  You maybe right that build costs are justified by higher day rates. 

 

I'm biting my nails on Awilco.  I find myself getting to different conclusions every other day.  Because of dividend, you are really only risking half of what you put in.  But it's a trade, and for a trade, maybe you get a better set up with oil a bit lower than here.

[krazeenyc]

This I don't understand.

 

1- Why is everybody on this board so concerned with Awilco having only 2 ships?

Why is everybody so concerned that some freak accident will happen to either of their ships?

 

When you drive to work, you can die in a car accident.  When we drill for oil, people can die in accidents like Deepwater Horizon.  But it doesn't make sense to overestimate the risks and the downside in my opinion.

 

2- Why would it make sense to value these companies based on yield, P/E, or book value?

 

Clearly these vessels have a private market value.  Clearly you shouldn't overpay for the private market value of these assets (which fluctuates a lot).

 

I think there is extra concern because of combination of the age of ships and the number.

[Myth465]

Also HJ, I have come around to your take on ESV. They have done well, but likely would have done better had they not overpaid. Synergies where there but it did eat up earnings for the last few years. Thanks again for your thoughts.

[HJ]

Also HJ, I have come around to your take on ESV. They have done well, but likely would have done better had they not overpaid. Synergies where there but it did eat up earnings for the last few years. Thanks again for your thoughts.

 

In the spirit of "Maybe in error, but never in doubt", it's so easy to criticize in hindsight. 

 

Myth, I always find your commentary in oil and gas business very insightful.  It's a business that I'd like to learn more about. 

[Myth465]

Thanks HJ, hopefully I can make money off the producers at some point.

Most of my gains in the space seem to come from the suppliers. Perhaps that says something lol.

[DTVI]

Well, there have been some VERY interesting developments lately... 

 

On April 5th, ORIG bought back all 56.1 million shares owned by DryShips (40.44% of the outstanding shares) for $49.9 million or $0.89 per share.  Also, they have been continuously buying back $709.3M in principle amount of their 2017 and 2019 notes at significant discounts, resulting in a gain of $314.2M ($189.17M of which was recognized in 2015).  The company allocated $180 million to a new subsidiary "for the acquisition of distressed asset opportunities" which they have indicated they would use in a selective and opportunistic manner.  The first use of this cash was to repurchase the shares from DryShips, then they spent another $65M to purchase an UDW drillship at auction (pennies on the dollar compared to building a new one), leaving $65.1M remaining, which could be used to fund more debt repurchases or assets that they do not currently own (another drillship perhaps?).  Given the shrewd financial maneuvering thus far, I am confident that these funds will be put to a good use, whatever that may be. 

 

There are several ORIG articles on Seeking Alpha by Fun Trading that have tracked these developments.  There is also a writeup at VIC from 2013 by gary9, pegging ORIG's value at about 8x 2015 EBITDA, which the author estimated at that time to be "close to $1 bln" (https://www.valueinvestorsclub.com/idea/OCEAN_RIG_UDW_INC/95109)  Now 2015 has come and gone, and ORIG did indeed achieve the estimated $1bln in EBITDA (taking out the $415M non-cash impairment loss), but instead now trades at an EV/EBITDA around 4 (and going lower as they repurchase debt at a discount), with the market cap being only a small portion of the $4bln Enterprise Value.  Assuming ORIG can even go up one notch to 5x 2015 EBITDA, it would imply a stock price of over $10/share.  At 8x 2015 EBITDA ($50+/share), it would obviously be a truly incredible home run from where we are at right now, and given the way the company has been handling the downturn thus far, I would certainly not rule out that sort of valuation at some point in the next few years assuming oil doesn't go back into freefall mode again.

 

As always, there are ongoing risks related to the CEO, George Economou.  Of note, the shares repurchased by the ORIG subsidiary will retain voting rights under Cayman Islands law so Mr. Economou is not reducing his voting control.  With this in mind, however, it seems like the market is pricing ORIG for bankruptcy right now, but that seems increasingly unlikely to me considering the repurchases of near-term debt and strong cash flows.  I have to imagine that at this price, and given the recent developments, ORIG is massively undervalued.  The short % of Float as of March 31st (right before the buyback) was a pretty reasonable 6.85%, so hopefully there is nothing too major that I am overlooking.

 

Is anyone else following this?

[whistlerbumps]

I don't think you should focus on 2015 EBITDA.  That is most likely supported by contracts that will eventually runoff and have to recontract at lower levels (if at all).  For example, if you use 2018 consensus EBITDA estimates of ~380mln then it is trading at 10x and 2019 EBITDA estimates are ~165mln which would be 23x EBITDA...