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Strong Buy on Ocean Rig

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On Jun 29, Zacks Investment Research upgraded Ocean Rig UDW Inc. to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

The ultra deep water rig provider delivered positive earnings surprises in two out of the last three quarters with an average beat of 45.6%. Ocean Rig has witnessed an upward revision in earnings estimates on the back of strong first quarter results.

Ocean Rig’s first quarter 2013 earnings per share came in at 5 cents, surpassing the Zacks Consensus Estimate by 122.7%. Total revenue at the end of the first quarter was $246.4 million, surpassing the year-ago results by 51.2% and the Zacks Consensus Estimate of $221 million by 12.1%.  

A key positive for the company is the promising outlook on the ultra deep water drilling industry. Ocean Rig signed nearly 20 new contracts or extensions year to date, excluding the exercise of existing options. The company’s current backlog of $4.9 billion indicates that major oil and gas companies like Total S.A. (TOT - Free Report) , ExxonMobil (XOM - Free Report) and ConocoPhillips (COP - Free Report) among others will have to depend on Ocean Rig for the supply of rigs for heightened deepwater exploration.

The new ultra deep water drilling areas in East Africa and the Asia/Pacific are coming into prominence besides traditional regions like the Gulf of Mexico and West Africa. Ocean Rig’s decision to take delivery of three new ultra water rigs in the second half of 2013 seems to be well timed. These new drillships will allow the company to reap the benefits of strong demand for deepwater rigs.

The Zacks Consensus Estimate for 2013 increased 171.4% in the last 60 days to 38 cents per share, reflecting a year-over-year projected growth of 176.0%.  The Zacks Consensus Estimate for 2014 increased 3.8% in the last 60 days to $2.18 per share, reflecting a year-over-year projected growth of 474.4%. 

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