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Ocean Rig UDW Dilutes Outside Investors — But Not Its CEO

On a generally “up” day for the stock market, shares of DryShips (NASDAQ:DRYS) subsidiary and oilrig operator Ocean Rig UDW (NYSE:ORIG) headed the other way, sinking 13% under the weight of a dilutive stock offering.

As announced by the company, Ocean Rig has priced an offering of 28,571,428 shares at $7 apiece, a development that came as some surprise to investors who had been paying $8 and up for the shares just prior to the announcement. Assuming all shares sell at the asking price, Ocean Rig will raise $200 million from its stock offering — and dilute its current shareholders’ stakes by more than 21%.

Actually, make that most of Ocean Rig’s shareholders. As it turns out, one very important shareholder — Ocean Rig Chairman and CEO George Economou — will suffer no dilution whatsoever from the stock offering. This is because Economou has elected to spend $10 million of his own money to acquire 1,428,571 of the new shares. Ocean Rig notes that this insider’s purchase “maintains [the level of Economou’s] direct ownership in Ocean Rig [at] approximately five percent of its common stock.”

What does it mean to you?
Outside shareholders of Ocean Rig may take some encouragement from Economou’s decision to maintain his stake in the company, even at the risk of his own personal capital. They may even be inclined to purchase more shares for themselves — especially with the shares now being 13% cheaper than they cost as recently as Tuesday.

After all, Ocean Rig shares today cost just 3 times earnings and, unlike shares of Ocean Rig’s parent company (which are also sinking, by the way), pay a generous dividend yield of 9.4%.

Investing in Ocean Rig in hopes of scooping up some cheap shares, or raking in a rich dividend, however, does not come without risk. In particular, while Ocean Rig possesses about $509 million in cash on-hand at last report, and now stands in line to gain $200 million worth of liquidity, the company also carries a massive debt load of $4.8 billion.

Even if Ocean Rig were to apply every penny raised from this week’s stock offering to paying down its debt, therefore, Ocean Rig’s balance sheet would remain more than $4 billion in the red — and the stock would still be worth less than one quarter of its own debt load.


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