Energy Business

More Choppy Seas Ahead for Ocean Rig UDW

After energy stocks rallied in the market on Wednesday, Ocean Rig UDW Inc. (NASDAQ: ORIG) gave back its gain and then some early Thursday on a less than favorable business update.

The company gave an update on its fleet and where it currently stands, based on spending cuts from major oil companies. The problem appears to be that some of the rigs mentioned in the update do not have plans for operation past a certain time and potentially could be cold stacked or even scrapped.

The first update that the company gave was that the Ocean Rig Olympia has successfully started its new contract in Angola as of August 15. This rig is expected to move to the Ivory Coast for one well in the fourth quarter of 2015 and return to Angola to complete its remaining contract until June 2016. Currently, there are no prospects for further employment and if no employment is found the rig will be cold stacked and the respective subsea production systems (SPS) will be postponed.

Second, the Ocean Rig Skyros started its new six-year contract in Angola on October 1.

The Eirik Raude is currently completing its third well in a six-well program in the Falklands and is now expected to remain employed in the Falkland Islands into January 2016. Currently, there are no further prospects of employment for the rig in the Falkland Islands, and if no employment is found the rig will be cold stacked and the company will consider all its options, including disposing of or scrapping the unit.

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Next, The Leiv Eiriksson is in the process of completing its current well in Norway. At the moment, there is no further program for the unit under its current contract, which is expected to expire in March 2016. Currently, there are few further prospects of employment for the rig, and if no employment is found the rig will be cold stacked and the company will consider all its options, including disposing of or scrapping the unit.

Finally, the Ocean Rig Mylos is in the process of completing its current well in Brazil. On September 25, 2015, the company received notice of material breach under the contract that entitles the client to terminate the contract if such breach is not remedied within 75 days. Ocean Rig believes that such notice is totally without merit and it intends to defend its rights under the contract.

George Economou, chairman and CEO of Ocean Rig, said:

The market continues to remain challenging due to the massive spending cuts initiated by the oil companies. In this environment, cash preservation and liquidity remain our number one priority and we will adjust our available capacity to the new market conditions. For rigs that we cannot secure long-term employment that are coming up for their 5-year SPS we will cold stack the units and in the case of the semisubmersible rigs seriously consider all our options including disposal or scrapping.

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Shares of Ocean Rig closed Wednesday up 2.3%, at $2.62 in a 52-week trading range of $2.02 to $14.58. In early trading Thursday, shares were down 14.1% at $2.25. The stock has a consensus analyst price target of $7.64.