Ocean Rig (NASDAQ:ORIG) has just announced details on the annual general meeting of shareholders, the relocation of principal executive offices to the Cayman Islands, amendment of its agreement with TMS Offshore, and the appointment of new officers and directors. The company’s intent to switch to the Cayman Islands has been long-known, so there is no real surprise in the announcement.

TMS Offshore is a CEO-controlled company that will perform services previously provided by Azara and Basset, CEO- and CFO-controlled companies, respectively. So nothing new on the self-dealing front. Only one item in the press release deserves our attention. Mr. Michael Pearson, located in the Cayman Islands, has joined the Ocean Rig board.

Here’s what Ocean Rig had to say about Mr. Pearson:

He is a chartered accountant and insolvency practitioner by background having commenced his career at Arthur Andersen. He moved to the Cayman Islands in 2008 from where he currently acts as an independent director to a number of listed and private entities and investment funds undertaking financial and operational turn arounds and wind downs.

This is no coincidence. In the previous two quarterly reports, Ocean Rig mentioned the possibility of restructuring and even bankruptcy. The last reportshowed that the company made no bond repurchases, which crushed the bullish thesis and put significant pressure on Ocean Rig stock.

Since then, the company’s shares were gradually sliding to pre-OPEC/non-OPEC deal levels. This slide intensified in the last few days as it became clear that the oil producers’ deal changed nothing in the short term for offshore drillers, and that majors preferred to allocate their capital to short-cycle projects.

In my view, the appearance of an insolvency practitioner on Ocean Rig’s board directly hints that the first bit of news on the restructuring is around the corner. The continued distress in the UDW segment leaves little if any chance for Ocean Rig to continue operating with its current capital structure.

I believe that Seadrill’s (NYSE:SDRL) restructuring is informative regarding what we can expect from the Ocean Rig restructuring. In Seadrill’s case, bondholders demanded a complete wipeout for shareholders. Ocean Rig’s senior secured notes mature in 2017, and their secured nature gives bondholders an edge in negotiations with the company.

At the same time, banks will try to avoid any kind of a haircut, paving the way for a difficult banks vs. bondholders game and potentially leading to a bankruptcy filing. The bull argument has long been centered around the fact that the majority of the $3.9 billion debt (at the end of Q3) matures after 2019, giving the company time to wait for the rebound of the offshore drilling market.

The problem lies in the conflicting interests of creditors who want to protect their capital and the “strange” behavior of Ocean Rig management, which siphoned cash into Ocean Rig Investments in the midst of a major industry crisis. Fellow Seeking Alpha contributor Fun Trading has recently argued that Ocean Rig’s purchase of the Ocean Rig Paros drillship was an excellent deal, but I cannot disagree more. In my view, this purchase was one of the factors — together with Ocean Rig’s share repurchase from Dryships (NASDAQ:DRYS) — that tested the limits of creditors’ patience.

A company with a mountain of debt and unclear perspectives for its rigs should not be purchasing new rigs only to cold stack them — period. Nobody really knows how much reactivation of the new generation rigs will cost, but one thing is certain: Cold stacked rigs won’t see work for at least several years. Thus, Ocean Rig took valuable cash and froze it in Ocean Rig Paros.

There were no creditor-friendly actions by Ocean Rig in the last year, so don’t expect that creditors will be kind to the company or its shareholders. The typical argument that “banks don’t want to own rigs” does not explain why banks (or bondholders) would want to leave anything for common shareholders. In a case where the company cannot reach an agreement with both banks and bondholders and is taken to bankruptcy court, the wipeout for shareholders is mostly guaranteed as current values of Ocean Rig assets are significantly lower than the $3.9 billion it owes to its creditors.

Those who would argue that asset values are much higher than one could derive from the price of Ocean Rig Paros should note that bankruptcy judges have increased their knowledge of the industry, as highlighted by Paragon Offshore (OTCPK:PGNPQ) case. Among other things, the judge basically forcedthe company to decrease dayrate and utilization assumptions. Decreased dayrate assumptions lead to decreased asset valuations, so the chances that the court decides there could be anything left for common shareholders will be slim in the bankruptcy case.

I continue to expect that Ocean Rig shares will slide toward levels seen right after the first mention of bankruptcy in the second-quarter report. Apart from any sudden positive news from the company, the only factor that could help Ocean Rig prices is a Brent oil breakout past $57.50. The appointment of an insolvency practitioner to the board shows that first news on the restructuring should be expected soon. In my view, there could be nothing left for common shareholders in this restructuring.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the above mentioned stocks.

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