3 Reasons To Consider Ocean Rig For Oil Exposure
Offshore drillers have been some of the hardest hit oil stocks since the commodity sold off more than 60 percent. Although drillers are largely looked at as a bad neighborhood, Ocean Rig is one of the best houses in town.
The stock is down 53 percent over the past several months on an industry wide sell off, as E&P companies cut back on the amount of crude they produce. Simply put, as the price of oil continues to slide, fewer and fewer sources of production are valuable enough to pay for themselves. The following chart shows the steep drop in the number of contracted offshore drillers in North America.
Ocean Rig has one big advantage over many of its competitors in this regard: the fleet is very new. This means that E&P companies are eager to continue contracting Ocean Rig’s fleet, while older rigs owned by other companies are much more likely to be stacked. As proof of that, Ocean Rig’s fleet was fully contracted in 2014, is almost 100 percent contracted for 2015 and is more than 60 percent contracted for 2016.
The high rate of 2015 contracts also helps to avoid the second-largest risk to offshore drillers: falling day rates. As a surplus of rigs builds under weakening demand, day rates (the amount paid to rent offshore rigs per day) have been quickly falling. According to the company’s most recent investor presentation, Ocean Rig only needs to have day rates of $112,000 per day to average $500,000 in 2015. Day rates of $341,000 are needed in 2016 to have a fleet-wide rate of $500,000. These rates compare to daily operating expenses of $187,700.
According to Rig Zone, day rates for Drillships and Semisubs are far above this level.
Lastly, Ocean Rig currently pays an 8.11 percent dividend. If the dividend rate were maintained, this means shares would pay for themselves in a little more than 12 years.
Investors should be aware that Raymond James recently downgraded the stock to underweight.
Shares are up 7.4 percent this week on the strong price of oil.