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ORIG...a nice, risky oil play

65,559 Views | 398 Replies | Last: 5 yr ago by The Wonderer
Brisket Fat Cap
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I started my first of what I hope are many $10k purchases in ORIG today at 5.185. I hope to dollar cost avg. my way in as I am clearly catching a falling knife. Stock shot up from ~6 to ~9 from March to May when oil rebounded about $10/barrel briefly. Just imagine what happens if oil gets back to where it was last year. I got time and I will be in this stock for a while if need be. I can't help but think oil will rebound at some point and I think this is a nice risky gamble for a relatively young investor as myself. I'm going to try and post my purchases here in real time as much as possible. I lost about $100 today on the stock on day 1. I'm thinking my 2nd purchase will be somewhere around $4.82 (if it gets that low) to dollar cost avg. my entry point at $5 but like all investing that is subject to change.

Today's purchase:



As always invest at your own risk and speak with your financial adviser before doing so.
Dan Scott
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AG
What's the story on this company, why them over a SDRL or RIG? They're cashflow negative so doubt that dividend doesn't get cut. They're also based out of Athens, Greece. That's seems really risky right now.
5C
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AG
I agree that oil will rebound at some point but, man, you have some sack on you.
Brisket Fat Cap
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Dan, thanks for the question.

I'll tell you my thought process on choosing ORIG.

I liked the oil play because it has been beaten to death. Quite simply I think it is just a matter of time before oil rebounds so who has the most explosive potential if it does rebound? I'm looking for the coiled spring. Within the oil sector, the offshore drillers seemed to be the most defeated, down anywhere from 60-80% off their 2014 highs. Then I started looking at the peers within the offshore drillers. The biggest dichotomy is drillers with new 5th/6th/7th generation rigs and those with generally older rigs. Older rigs garner lower daily rates, they are less safe and generally less desirable. They are being scrapped or cold stacked at incredible rates (some think up to 65% of all older rigs will meet this fate very soon). On the contrary newer generation rigs are safer, more desirable and demand higher rates (many are under contract for $500,000 - $650,000+ per day!). The companies with newer rigs are definitely going to be best positioned to emerge from this downturn.

The downside of newer rigs is the companies that own them are likely in a lot of debt because of them.

So I wanted to see who was best insulated from the current depreciation of oil. By that I mean who has the greatest % of their rigs under contract through 2017? The answer was two companies...SDRL and ORIG. Smaller companies, very new fleets, well contracted out through 2017 and very depressed with regards to share price. SDRL has dropped from ~40 to ~10. ORIG has dropped from ~20 to ~5 since last fall.

ORIG's contracted rate is near 100% for 2015. Meaning regardless of the price of oil, they have tight contracts for nearly all their rigs for the remainder of the year. They are contracted out at about ~70% in 2016 and ~45% in 2017. That is incredible insulation. SDRL is below those numbers by a small amount each year. If ORIG never signed another additional contract for their rigs in 2015 and 2016 (this is the worst case scenario imaginable), they would still be above the break-even day rate of about $328,000/day.

My next task was debt. SDRL is in the neighborhood of $13.8 billion with some sizable payments due in the next couple years. ORIG is only at ~$4.5 billion with no significant payments due until 2017. That was a big deal for me. I need my company to have protection from the downturn. And they do that by having their rigs under contract for the next couple years, minimal debt payments for the next couple years and by delaying new rig builds (ORIG was able to push their two new builds off to a 2018 and 2019 delivery date respectively. SDRL on the other hand has ~15 total rigs either being delivered or coming off contract in the next couple years, that is scary in this envt.).

ORIG's total contract backlog is ~$4.7 billion.

Let's move to your point about cash flow. Its true they were neg. last year. Oil was at a record level last year and I'm sure expansion was on their mind. They spent a lot of money on new builds, they have already paid $300 million + for them. So in 2014 they spent a good chunk of money paying down debt, loan to DRYS (more on that later), cap ex and of course their dividend (more on that later).

Cash flow is important but I think net income is equally important, especially if a company is making a lot of money and focused on expansion. Lets say you build a new rig and spend a lot of money on it, yeah that decreases your cash flow but will positively impact you in the long run. The good news for ORIG is they were able to defer their two new builds out at least until 2018 so good chance we've recovered in oil by then. ORIG's GAAP net income last qtr was $.31/share (est. were $.08) or $41 million. They make good money even in the worst climate their company has ever seen for oil.

Cash on hand for ORIG was $500 million at the end of last qtr. They recently had a share offering (more on this later) that added another $200 million. Thats $700 million total in free cash and they have a market cap of ~$865 million. Not bad IMO.

Another distinguishing factor between ORIG and SDRL is the P/E. Currently 2.2 for ORIG and 3.7 for SDRL. Incredibly cheap for either company but damn 2.2 is sexy.

All in all ORIG looked be the best in class by my eye.

There are things I don't like about ORIG though, none of the companies in the sector were perfect.

Biggest thing I dislike is the relationship with DRYS, a struggling company that owns 47% of ORIG. Both companies share 1 CEO. I prefer my CEO's interests be solely invested in one company and one alone. ORIG has leant DRYS money in the past. They recently forgave some of that debt in exchange for buying back ORIG stock. And then a short time later they had a share offering of 28 million shares at a much lower price ($7). The CEO had to know about this as he leads both companies. ORIG lost about $2-3/share on the deal.
The CEO owns 5% of ORIG stock, combine that with DRYS' 47% ownership and that pushes them back to a majority (52%) ownership of ORIG (prior to the offering DRYS owned ~55% of ORIG stock by itself).

Another thing I didn't like is the 28 million share offering. Specifically, it lacked clarity. Why raise money instead of cut the dividend? Doesn't make sense. The only thing I can think of is that DRYS makes ~$50+ million per year on the dividend alone. That is their main cash cow for a struggling company. If ORIG cuts the dividend, DRYS loses out on that future income. The CEO (remember he is the CEO of both companies) knows this and wouldn't want to harm either of his organizations. That dividend yield is currently about 15%. That is crazy high. An analyst asked about it on the call last time and the company gave a vague response that they are aware most other drillers have cut their dividend and they will do what is financially prudent moving forward. I'd cut the dividend tomorrow if I were CEO. The stock will probably drop a good 10% when they do but I'm not afraid as I plan to buy a lot more of the stock moving forward.

With regards to the company being headquarted in Greece, I don't see that as big of an issue personally. They are a global company with rigs all over the world. 80% of their finances are done in US dollars, the remaining 20% in various local currencies. The stock has been hammered compared to their peers in the last few days based on Greece but its a lot of smoke IMO. Had a lot to do with why I dipped my toe in the water today of all days.

I'm tentatively looking at $4.82 as my next $10k purchase to dollar cost avg. my share price at $5.

Definitely going to keep a close eye in the near term on tomorrow and Thursday's oil inventory data, Iran deal, Greece and China. But these will all affect my next $10k purchase. Overall I'm in this stock for the long haul (tentatively 1-2 years or until oil rebounds).

Apologies for the long response.
5C
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AG
Call me a pessimist but I don't think oil is rebounding by 2018
Brisket Fat Cap
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Nobody reaIly knows when oil is going to rebound but I'd wager it would be before 2018.

Oil supply gets all the headlines but oil demand has never been higher. Demand is a one-way trajectory up and nothing is going to derail it as Earth's population increases exponentially.

On the flip side various factors can potentially negatively impact supply not limited to:

1. Middle East turmoil and unrest
2. Major terrorist attack
3. Down trend in US shale production secondary to current decreased rig use (rigs have nearly been cut in half but production has stabilized at ~9.5 million bpd, I think there is a delay and we will see a significant drop in Q3/4 of 2015 and beyond)
4. OPEC reverses course on their current policy of "pump as much oil as possible"
5. Iran violating terms of their soon-to-be new agreement with the US on weapons inspectors (could take Iranian oil back off the market)
6. New laws inhibiting US fracking (earthquakes in north TX and OK have skyrocketed in the past few years and numerous studies have shown a strong correlation between earthquakes and fracking)

With regards to this last point, most of the local governments in TX and OK are strongly conservative and pro-drilling so it would take a lot for them to ban shale production in any capacity BUT Denton, TX recently attempted to do just that before the state overruled them. Despite the strong conservative and pro-drilling nature of this area, even these citizens would only tolerate so many cracked foundations before a halt to fracking is made. Again this is admittedly a long shot but producing 9.5 million bpd via shale...any interruption could have huge consequences.
IrishTxAggie
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AG
You're playing with fire on this one IMO... I wouldn't touch a Greek company with a 10ft pole. Personally, I'd be surprised if we see $100/bbl oil before 2018. Most signs point to it has 'rebounded' and $58-$65 seems to be a sweet spot and still profitable number for the big boys.
Brisket Fat Cap
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I openly admit I am playing with fire. The stock didn't close at an all time low today b/c its a safe play, hence my use of the word "risky" in the title of this thread. Hard to get the kind of gains I am looking for without taking large risk. This kind of investment isn't for everyone. But for someone that is young, has high-risk tolerance and is looking for potential aggressive growth, like I am, its a good option.

While $100 oil would be nice this stock doesn't need it for some nice gains. When oil gained $10 barrel between March and May of this year the stock jumped 50% in value.

And again with regard to Greece, this is a global company. They literally have rigs and do business all over the planet. 80% of their business is in US dollars, the remaining 20% is in various local currencies. The Greece aspect is overblown IMO. It may weigh on the stock in the short term but long term the only issue is the price of oil.

MaysAggie2015
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SDRL and their Wizard of Oz financials. Why you'd believe e anything that came from even their auditers is asinine.

Lets create JV's, transfer assets between them, record profits, keep junk off books, and use create bank loans to do it all. Look at who financed their rigs. They sell back and forth to another company. Cough cough ,I mean their JV.
aggie028
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AG
I would buy something like Halcon. High risk but would be bought out at a certain price.

If that company is really based in Greece, you've got a screw loose.
Brisket Fat Cap
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Mays,

You bring up a good point about SDRL. Their fuzzy math was disconcerting. They branch off new companies and park non-functioning rigs with them and transfer debt, etc. Sea Drill Partners, North Atlantic Drilling, etc. They are out of control. It made figuring their finances out very difficult. That was another big strike against them for me.
MaysAggie2015
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I like Halcon Options. You can make a nice strangle for a good price right now.
Dan Scott
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AG
Thanks for the info. I've been really busy today but will read up on it when I get a chance.
TxAg20
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AG
The due diligence you've apparently done is impressive, but something seems off that you have a Scottrade account holding a single stock, but seem to possess above average DD/evaluation ability.

I really don't like that ORIG/DRYS relationship. That's a bad deal and I'm sure DRYS and the CEO aren't going to let go of their majority share of ORIG.
BT1395
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AG
Thanks for the info, BFC. Didn't want to put real $ on the table for a company like this, but I just bought 10 call options for September @ $6 XP. We'll see what happens...
Brisket Fat Cap
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TxAg20,

I think the implication of your 1st paragraph is that being knowledgeable and having all your eggs in one basket are two mutually exclusive events.

I admit I'm not your average bear when it comes to investing. I am NOT looking to put my money in index funds for the next 30+ years and grinding out 6-7% returns annuanlly. No thanks. I'm not looking to pass Cramer's "Am I Diversified" test.

I'm young, I've got a job that pays very well and I am nearly 100% insulated from any economic downturn. If my one pick goes belly up I still make good money and have plenty of time to make up for my losses.

My strategy is definitely not for everyone but in my situation, young, paid well, job security...I think it makes perfect sense for me. I've got another good chunk of change in a 401k and its humming along with index-type investments.

Is there hubris involved? I'm sure. But not many passive individuals are into huge risk/reward scenarios. I'm fully aware of the potential risks AND the rewards of my investing strategy.

With regards to your pessimism surrounding ORIG's relationship with DRYS, I completely agree. Its likely the biggest downside to the stock. None of the players in that sector are free of baggage though and in ORIG's case the pluses outweighed the minuses in my book.
Brisket Fat Cap
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Interesting day. Stock shot up 3+% after losing 4% yesterday. I have these weird mixed feelings on the stock. I want it to go up so I can make money, I want it to go down so I can get the rest of my money in. Every day is win-lose. Its strange.

US Rig count actually went UP by 12 according to today's report. There hasn't been nearly as much capitulation in the US market as Saudi Arabia would've hoped and now we find we are putting more rigs to work and US oil production is as high as its ever been at 9.7 million bpd. Insane.

Short term focus remains on Iran. Solid deal gets done, oil could drop $5-10 immediately, the reverse could happen if talks fall apart (not likely).

Greece remains a red herring.
SmoothRuckus
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AG
quote:
Short term focus remains on Iran. Solid deal gets done, oil could drop $5-10 immediately, the reverse could happen if talks fall apart (not likely).
Like you, I think most of the market already expects the deal to go through, so it's likely factored in and the drop wouldn't be as substantial. Now, if somehow it fails, I think the reverse is definitely possible (although like most, I highly doubt it fails).
Brisket Fat Cap
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Pretty solid 5% haircut today.



$4.82 was a general neighborhood for my 2nd $10k purchase so I could avg. in at $5/share. With the stock in the $4.70's and all downward pressure on oil there is no rush to make that purchase right now. If I can get it under $4.50 I can bring my avg. entry point way down. Going to wait for some sign of life first...inventory data, opec news, etc. before pulling the trigger on purchase #2.

P/E is nearly 2 flat now and the dividend yield is 16%. Crazy.
Dr T and the Women
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AG
You have convinced me. I put in a decent size limit order for 4.5. Let us see what happen
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PetroAg13
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AG
$0.76 dividend is now around 16% of stock value. You think they will keep that up? If not, how far will it fall if they cut the dividend?
TxAg20
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AG
quote:
$0.76 dividend is now around 16% of stock value. You think they will keep that up? If not, how far will it fall if they cut the dividend?

Their DRYS relationship gives them a huge incentive to keep the dividend high. ORIG has already demonstrated they'll issue equity before cutting the dividend. I would be a buyer if I thought they would sever the DRYS relationship. Until DRYS is out of ORIG, DRYS will make ORIG hemorrhage cash. I think DRYS will go into bankruptcy long before ORIG and those shares will be sold off, that's when I would enter ORIG. I don't think ORIG goes bankrupt in the near future, but I think the share price has the potential to go way down.

The perfect scenario would be ORIG makes another big equity offering or two and dilutes DRYS ownership to the point where an activist can vote in a new board and sever the tie with DRYS. That would be a good time to short DRYS and get long ORIG.
jh0400
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AG
quote:
ORIG has already demonstrated they'll issue equity before cutting the dividend.


So you'll keep the dividend and get diluted out in the process. If they issue shares to cover you're close to indifferent economically. Looking at their cash balance and historical burn rates, they've got ~250 days of runway excluding future dividends. IMO, there's no way that dividend isn't cut significantly.
TxAg20
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AG
I think the dividend is a high priority for them evidenced by the fact that they haven't cut it yet.

Read up on George Economou, CEO of ORIG and DRYS. You want to align your interest with his if you're investing in his public companies. Figure he's going to make moves with ORIG and DRYS that put the most money in his pocket, share price be damned. The problem is, he also self deals between ORIG, DRYS, and his private company which we obviously can't buy shares in.

I think ORIG has a lot of potential as a standalone company. I'm just not sure it will ever be a standalone company.
jh0400
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AG
The dividend may be a priority, but maintaing it requires continued demand for the company's debt and/or equity. I don't know what ORIG's borrowing capacity is, but using SEOs to fund common dividends is not a sustainable strategy.
Brisket Fat Cap
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Dr T,

Good luck. I would advise anyone buying in to buy in pieces so you can avg your way down. And of course consult your financial advisor, who will likely disagree with everything I am doing.

This stock is not like a recent hot stock, LNG? that was on this forum that everyone was buying last year on the way up.

This is a dangerous stock in a dangerous sector. It will be very difficult to perfectly time the bottom so averaging in is the best strategy.
Brisket Fat Cap
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Petro,

Very tough to say whether or not they will cut the dividend.

They haven't yet obviously while almost every single one of their peers has done so.

It's illogical to keep the dividend in light of the current oil market.

My THEORY is they are keeping it b/c the CEO wants to protect DRYS's main source of income, the ORIG dividend.

Nobody knows what they are going to do with the dividend but they clearly want to do everything they can to keep it.

If they cut it I'm ok with it b/c I know it will strengthen the balance sheet.

If they keep it and I'm getting 14-17% depending on where I avg in at the dividend will pay for my capital gains tax if I sell after holding at least 12 months.

I'm good either way.
Brisket Fat Cap
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TxAg20,

I agree the relationship with DRYS is a bummer. And I wish it didn't exist.

But there is a reason this stock has a P/E of 2 and has fallen farther than its peers.

If this was a perfect company with a rosy future and tons of analyst upgrades it wouldn't be trading near an all time low having lost 75% in the last 9 months.

That's the risk involved.

For the record I don't think the companies will ever separate given the fact that I think they are GE's babies. What he has worked his whole life for.

The board is made up of all his friends too so he isn't going anywhere.

That's the gamble.
Brisket Fat Cap
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JH,

I'd like to see your math on only having 250 days of cash not including the dividend.

They have 1/2 billion in cash on hand plus they just got another $200 million from the share offering. That's $700 million with a market cap of $764 million.

They have no significant debt payments until 2017.

And bottom line they are still making a bunch of money every qtr.

I think you may be factoring a lot of money they put towards new rigs last year when they had an eye on expansion with oil at $100+/barrel. They have since delayed those rigs to 2018/9.

jh0400
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AG
I didn't include the SEO. Quick and dirty, they have an annual FCF burn of around $800MM. 5/8*365=~228. They can reduce capex or adjust vendor terms to squeeze more time, hence the 250 days of runway estimate.
Brisket Fat Cap
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The capex is where the difference lies.

They have already paid in $300+ million for the two rigs I mentioned earlier. Not long after oil tanked they cut back tremendously and even delayed delay of the two rigs to 2018 and 2019.

Last year they were in expansion mode given where oil was trading ($100+) and spending money accordingly. They are in defense-mode now in every aspect except the dividend which was addressed earlier. Again I think they should cut it but they appear to be adamant it stays in place.
Brisket Fat Cap
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Just as a heads up, I might be making my 2nd purchase tomorrow if ORIG turns south heading into the weekend.

I was a little frustrated it climbed today but it couldn't help but piggy back on the market's early gains and oil's mini-rally. It might turn into a positive though and set up a nice reflexive turn to the downside tomorrow.

If the Iran deal gets announced I could see some panic selling in the oil sector. The latest deadline for the Iran deal is tomorrow so hopefully it finally goes through and people sell into the weekend.

If it gets low enough I may buy $20k instead of $10k. I can lower my dollar cost avg. by 2/3 instead of 1/2.

jh0400
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AG
quote:
The capex is where the difference lies.

They have already paid in $300+ million for the two rigs I mentioned earlier. Not long after oil tanked they cut back tremendously and even delayed delay of the two rigs to 2018 and 2019.

Last year they were in expansion mode given where oil was trading ($100+) and spending money accordingly. They are in defense-mode now in every aspect except the dividend which was addressed earlier. Again I think they should cut it but they appear to be adamant it stays in place.



I miscalculated the FCF run-rate when I looked at this earlier. Unless things really fall apart, they should have enough runway to get through 2016. If you're betting on a "magic happens here" moment two years into the future, why not play it with options?
ATM9000
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AG
quote:
quote:
The capex is where the difference lies.

They have already paid in $300+ million for the two rigs I mentioned earlier. Not long after oil tanked they cut back tremendously and even delayed delay of the two rigs to 2018 and 2019.

Last year they were in expansion mode given where oil was trading ($100+) and spending money accordingly. They are in defense-mode now in every aspect except the dividend which was addressed earlier. Again I think they should cut it but they appear to be adamant it stays in place.



I miscalculated the FCF run-rate when I looked at this earlier. Unless things really fall apart, they should have enough runway to get through 2016. If you're betting on a "magic happens here" moment two years into the future, why not play it with options?


This. I'm sure call spreads are cheap, achieve what you want to do, and do it without burning all of you opportunity cost (ie cash in an equity that might be a turd for 2-3 years of not longer)... You've done some good due diligence but you aren't trading smart in my opinion if you basically know you aren't seeing a bonanza for a year or 2 if at all.
bmks270
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AG
Risky gamble is right.
 
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