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.