Another not so good news for the Oil and Gas Industry - Ocean Rig Files For Bankruptcy

The Oil and Gas have never seen a slump as bad as this and lasting that long with no end in sight. Reasons greed and power led Oil and Gas industry to this worst ever slump

OPEC especially felt that they were at the height of their power and could do no wrong. OPEC with Saudi goading, flooded crude oil in excess of 10 million barrels of oil per day way above the daily crude oil demand to force the emerging Shale Oil sands industry in North America to fold .This was a serious miscalculations as the Oil Shale sand players proved resilient and cutting down on excess to stay leaner meaner stronger and profitable

OPEC saw slump in their revenue and with Oil Shale sand not giving in and tried to reverse the oversupply by cutting the supply of Crude oil produces and Shale oil sand smelling blood kept on pumping more and more oil as OPEC started cutting production

OPEC and Shale Oil are now in a total war with no prisoners taken war. OPEC will be the biggest loser as they only have oil but no expertize by themselves to produce oil and where else the western are finding innovative ways to produce oil at cheaper prices and soon the cost to pump a barrel of OPEC oil compared to Shale oil will be minimal

Oil rig owners did not keep an eye on long term rig demand and also did not learn from the oil boom and cycle in the past. The drilling companies started building rigs at furious speed and the rig market was oversupplied by nearly 70% more rigs than demand for the rigs. The rigs were expensive and need high day rates to pay off bank loans, pay high wages to crew and also pay high dividends to their shareholders. When the bottom fell over on the Rig day rates, these companies had debts in excess of the assets and also no much liquidity to weather the low day dates. This started with furious under cutting of day rates to land contracts for the rigs.

When industry picks up and when and if, do not expect the oil workers to flood back as they have suffered enough and now have secured jobs in other industry will not be flocking back unless the wages are high. To pay the worker high wages the rig day rates and the service contracts have to be high.

The industry will correct itself when fewer rigs are ready for work due to the lack of workers, the day rates will go up slow and steady. Recovery if there is will only start from 2021 onwards when the oil companies can expect high returns on their investments

80% of the workers who were retrenched, this was their first oil boom and bust cycled and a bad one. Do not expect all to return and only those who will return will be the workers who do not have jobs or unhappy with their present jobs. Rate of return maybe 30 to 40% of the old work force. Oil field wages will go up and up starting 2019 onwards

Shipyards became too greedy and started building rigs and an explosive pace and built over 200 new offshore rigs in the last 10 years and adding to the oversupply. Rigs were built by shipyard with no buyers in anticipation that buyers will be buying the rigs sooner than later. That was boom time and now with no buyers for these partly or fully built rigs, the shipyards are also in big financial mess and have lay off nearly 80% of their work force. No recovery for rig building until 2014 or later. Workers will need to be retrained as these workers who are building rigs in the future will be new workers with no experience in rig building.

It was all a matter of greed and power and Oil and Gas producing countries and companies can blame no one but themselves

Summary

As expected, Ocean Rig filed for bankruptcy.

Management will get 9.5% of new equity.

Common shareholders will get next to nothing.

Finally, the saga is over. Ocean Rig (NASDAQ:ORIG) filed for bankruptcy protection. In my previous article on the topic, I stated that the wipeout was inevitable for the common equity. Now these words received factual confirmation.

Ocean Rig entered into an agreement with creditors. According to the agreement, the company will be deleveraged by an exchange of $3.69 billion principal amount of debt for 1) new equity of the company, 2) approximately $288 million of cash, and 3) $450 million of new secured debt.

The company stated that existing shareholders will be diluted to an insignificant amount of post-restructuring equity of the company. Interestingly, 9.5% of new equity will be reserved under a new management equity plan.

This means that George Economou will be able to save his stake in Ocean Rig despite bankruptcy. Although painful, this is an invaluable experience for investors which teaches them to watch management incentives closely and to not automatically expect that management interests are aligned with interests of common shareholders.

You do not need a crystal ball to forecast the market's reaction - Ocean Rig's chart is available to everyone:

There is no need to gamble on Ocean Rig unless you are a day trader trying to profit from current volatility. The company will end up being owned by creditors and management. The "insignificant amount" mentioned by Ocean Rig in its recent filing will be truly insignificant, practically close to zero.

The story ends for the current Ocean Rig stock, but does not end for the company or for the industry. Shareholders of other drillers should watch this development closely because it is a major event for the whole offshore drilling industry.

Ocean Rig will emerge from bankruptcy as a much stronger competitor with a fleet of modern rigs. This will put additional pressure on the floater segment. Floater-oriented drillers are Diamond Offshore Drilling (NYSE:DO) and Transocean (NYSE:RIG), which recently signed a letter of intent to sell its jack-up fleet to Borr Drilling. Noble Corp. (NYSE:NE), Rowan (NYSE:RDC), Ensco (NYSE:ESV) and Atwood Oceanics (NYSE:ATW) also have floater presence. The Ocean Rig restructuring will have a significant impact on Atwood Oceanics, which has problems with the backlog and whose jack-up fleet mostly sits without work.

I expect that upcoming Pacific Drilling (NYSE:PACD) restructuring will end similarly for common shareholders. If Pacific Drilling reaches an agreement with creditors as planned, the floater segment will be put under more pressure due to the presence of a debt-free player with modern rigs. Only the outcome of Seadrill's (NYSE:SDRL) restructuring is unclear and there is still possibility that the company will remain leveraged after restructuring.

Bottom line

Ocean Rig opens the "restructuring season". Pacific Drilling and Seadrill will follow. If you feel the urge to gamble, stick to day trading offshore drilling stocks. Action that is called "investing" is now limited to the potential survivor group - Diamond Offshore, Rowan, Ensco, Transocean and Noble Corp.