The oil & gas equipment sector has been out of favor with investors this year, which now leaves some of the sectors biggest names and key players in the global oil market, such as National-Oilwell Varco, Inc. (NYSE:NOV), trading at historically low valuations.

Ocean Rig

Value in the sector is easy to find and there are several drillers are currently trading at a discount to the value of their fleets.

Ocean Rig earnings

Ocean Rig UDW Inc (NASDAQ:ORIG) is a drilling contractor specializing in ultra-deep-water and harsh environment drilling. According to the firm’s most recent quarterly report, the company had $6.2 billion in assets and $3.3 billion in liabilities, equal to a total shareholder equity of $2.9 billion, or roughly $22.3 per share, indicating that the company is currently trading at a 27% discount to the value of its net assets.

Having said that, the company only supports a current ratio of 0.96, although this is a fairly standard ratio for the industry and most of Ocean’s current liabilities stem from accrued expenses and short term debt, which can easily be rolled over (the company recently issued $1.8 billion in debt to repay existing facilities so there is no concern about the company’s credit worthiness) – cash & equivalents easily cover accrued expenses. Total net debt stands at $2.6 billion and net debt to equity is 90%, which in comparison to the rest of the sector is not high. Indeed, sector leader Seadrill Ltd (NYSE:SDRL) has a debt to equity ratio of 200%; debt is usually high in the sector due to the cost of rigs.

Reasons to invest in Ocean Rig

So, apart from trading at a discount to the value of its assets, what other reasons are there to invest in Ocean Rig UDW Inc (NASDAQ:ORIG)? Well, for a start the company has it’s all of its rigs and jack-up already on contract, with the average duration lasting until 2015 or 2017 if the current providers use the option to extend. The rigs are contracted to major providers such as Total SA (ADR) (NYSE:TOT), ConocoPhillips (NYSE:COP) and Repsol SA (ADR) (OTCMKTS:REPYY) (MCE:REP), removing any counterparty credit risk for the company. Moreover, the company’s total order backlog stands at $6.1 billion, locking in about 6 years’ worth of revenue at 2012’s rate of $1 billion a year. That said, the company’s revenue has grown a compounded 153% since 2009 so I would not rule out this backlog being recognised faster. This backlog essentially guarantees the company’s income, removing any risk that sales will not meet expectations.

Unfortunately, Ocean Rig is majority owned by struggling shipping company DryShips Inc. (NASDAQ:DRYS), although currently selling down its stake to pay off debts, DryShips still owns a 59.4% stake in the company. While DryShips continues to struggle, Ocean Rig could see investors continue to ignore the company as there is a risk that if DryShips’ suddenly needs to meet a cash call. However, if DryShips continues to sell down its stake in a controlled manner then this could provide a future upside catalyst. Additionally, as Ocean Rig is trading below the value of its assets, the company could become a juicy takeover target for peers looking to gain exposure to the specialist ultra-deep-water and harsh environment drilling sector.

All in all, as a value play Ocean Rig looks to be a fairly safe bet. The company is well capitalized, revenue is locked in for the next few years with oil majors removing credit risk and the company is currently trading at a 27% discount to the value of its net assets. On the other hand, the company does not offer a dividend so investors will have to wait for capital growth. Still, with revenues growing at a CAGR of 36% for the last four years, I doubt investors will have to wait long.