Could Ocean Rig Be The First Of The Deepwater Dominoes To Fall?

Ocean Rig UDW Inc. ORIG shares plunged more than 61 percent in Friday’s session after the company reported it's continuing to explore the possibility of bankruptcy. Deepwater drilling investors were hoping that crude oil’s surge from February’s low of near $26/bbl to above $51/bbl in June would be enough to keep deepwater stocks afloat. However, a pullback in recent weeks to the low $40s may have extinguished the last bit of hope that Ocean Rig can avoid a bankruptcy.

The Ocean Rig news seems to have served as a reality check for other deepwater stocks as well. Transocean LTD RIG shares fell 4.5 percent on Friday, and ENSCO PLC ESV shares dropped 3.8 percent to close the week.

The market appears to be re-thinking its knee-jerk selloff on Monday, however, as both Transocean and ENSCO have recovered much of their Friday losses.

Earlier this month, Susquehanna upgraded Transocean from Negative to Neutral.

Related Link: JPMorgan Sees Opportunity In Oil Services, Says M&A Will 'Take Backseat'

JPMorgan analyst Sean Meakim doesn’t share the bullish sentiment. In May, Meakim specifically urged investors to avoid offshore oil plays ENSCO, Transocean and Noble Corporation Ordinary Shares (UK) NE.

“Highly-levered offshore drillers in particular have mostly exhausted cost reductions and are now tapping the capital markets to avoid longer term cash flow hurdles,” he wrote.

Still, at their current depressed share prices, if these offshore drillers can continue to avoid bankruptcy until the oil market significantly improves, the stocks could make for a compelling high-risk speculation play.