Ocean Rig UDW Stock Sinks 18% in One Day: It Could Get Worse

By Jason HallFool.com

What:Shares of deepwater specialist drillerOcean Rig UDW have taken on a lot of water today, and are down 17.8% as of this writing. After today's drop, the company's shares -- which traded above $18 per share last summer -- are now worth about $2.15.

So what:Today's huge drop is the product of a fleet update the company released, which painted a mostly stark picture of plans to cold stack and potentially scrap or sell off three of its vessels in the next several months. Three vessels may not sound like very many, but it's 30% of the company's currently deployed and working fleet, so we're talking about a huge chunk of the company's operating cash flows that will dry up essentially overnight.

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Furthermore -- and this is probably just as big a part of the decline in the stock -- the company disclosed that it had received a "notice of material breach" for the contract of theOcean Rig Mylosvessel last month, which could lead to the early termination of the remaining year on the contract of that vessel. Of course the company says the notice is "totally without merit and we intend to vigorously defend our rights under the contract," but there's just no way of knowing how it will play out.

Now what:This is a very stark reminder that, as ugly as offshore drilling has been so far this year, it's really 2016 that's going to be very bad. As things stand, Ocean Rig is nearing a point where almosthalf its fleetwill be out of contract.

Frankly, this is as far from a "buy on the dip" opportunity as there is. It's more along the lines of catching a falling knife. In the water. And the water's full of sharks. They say it's time to buy when there's blood in the streets, but when it comes to offshore drillers, we haven't seen the real bleeding yet.

Be patient -- there will be huge opportunity for big returns in offshore drilling, but it's just too early to make any calls on who the winners will be.

The article Ocean Rig UDW Stock Sinks 18% in One Day: It Could Get Worse originally appeared on Fool.com.

Jason Hall has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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