Raymond James: Ocean Rig Has 'Near Perfect' Revenue Efficiency, But Shares Now Fairly Valued

Shares of Ocean Rig UDW Inc ORIG spiked higher by nearly 20 percent on Tuesday after the company reported a top and bottom line beat in its first quarter print.

In a report published Wednesday, Raymond James analyst Praveen Narra suggested that the gains in share prices largely reflect the fundamental improvement in the story, and shares are now fairly valued.

'Clean'

Of note, the analyst's comments follow the company reporting a "clean" first quarter earnings per share of $0.35, "strongly" beating his estimate of a loss of $0.04, versus a consensus estimate of $0.08 per share.

The analyst continued that the "strong" first quarter beat was due to a "near perfect" revenue efficiency, which was combined with an "impressive" cost control. Moreover, the company has taken substantial steps to relieve pressure on the capital demands by delaying the delivery of tow newbuilds with delivery dates now in the first 2018 and first quarter 2019.

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'Poster Child'

Narra further argued that Ocean Rig is a "poster child" in contract coverage. The company's high-spec rigs are 88 percent covered in 2015 and 69 percent in 2016. Excluding the three-quarter lull for the Skyros and 1.5 quarter gap for the Olympia, Ocean Rig is essentially fully contracted for 2015.

Looking forward to 2016, the timing of the Santorini seems "flexible" given recent action with the Crete and Amorgos, but Ocean Rig will still need to find contracts for the Olympia, Mylos, Eirik Raude, and Leiv Eiriksson. However, the company has already indicated it will move quickly to right size costs for rigs without opportunities in the next six to 12 months.

What's Next?

Narra updated his estimates and now expects the company to report a GAAP earnings per share of $1.91 in fiscal 2015, up from a prior estimate of $1.30 per share. Revenue is now projected to be $1.777 billion in the same time period, up from a prior estimate of $1.746 billion.

The analyst also revised his 2016 earnings per share estimate to $0.30 (from a previous breakeven), and revenue is now estimated to be $1.653 billion (versus a previous estimate of $1.646 billion).

Shares remain Market Perform-rated with no assigned price target.