Analyst Actions; Ocean Rig UDW Downgraded To Neutral, PT Cut $1 at Credit Suisse; Shares Drop 3%


Credit Suisse analysts have downgraded offshore drilling contractor Ocean Rig UDW Inc. ( ORIG ) to a Neutral rating from Outperform, while lowering the price target on the stock to $19 from $20 a share.

Cash Distributions? Not This Year

"We are downgrading ORIG to Neutral (from Outperform) and lowering our target price to $19 (from $20). While we believe management remains committed to returning cash to shareholders through a dividend (or potentially a MLP), we expect cash distributions to be a 2014 event at the earliest (not 2013)," said Credit Suisse. "With 10% upside to our target price, we believe ORIGs upside/downside is 1:1 - pointing to near-term dead money."

Nice Run. ORIG Up 15% YTD

"We believe the outperformance has been driven by a combination of ORIG's asset base (pure play UDW operator) and investor expectations of cash distributions. We expect Debt to EBITDA to average about 9x in back half of 2013 (not conducive for cash distributions) - but note Debt to EBITDA drops to ~4x in the back half of 2014.

"Looking at ORIG's most restrictive debt covenant (50% of previous Calendar Year net income payable as a dividend) - our estimate of $34M in net income in 2013 points to $17M in dividends - or ~$0.10 annually (0.6% yield) in 2014."

Another DRYS Sale Likely

"Another catalyst (negative) that we are expecting sooner rather than later is another sale by DRYS of its ORIG stake. Earlier this year DRYS sold 7.5M shares, dropping its ownership to 59.4% (from 65%). DRYS has already pledged 17M shares to its lenders and has 61M available. We see a funding gap for DRYS starting mid-2013, which could result in further ORIG share sales - (ORIG traded down ~7% after the February sale)."

Lowering Target Price To $19

"Our $19 target price is based on a DCF analysis and points to 7x our 2014 EBITDA estimate of ~$850M (Consensus $880M). We estimate ORIG's NAV at $18 (based on $660M/rig) - all of ORIG's floaters are single BOPs. Our $19 target price points to about 10% upside to ORIGs NAV. We are raising our 2013/2014/2015 EPS estimates to $0.23/$1.50/$1.93 (from $0.21/$1.48/$1.92) respectively."

Shares of ORIG are down 2.63% to $16.66 in afternoon trade, within a 52-week range of $12.14 - $18.43.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing , Commodities

Referenced Stocks: ORIG

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