We reaffirmed our Neutral recommendation on major contract
Diamond Offshore Drilling Inc.
), on Aug 26, 2013. In the recently reported second quarter, the
company's stable performance was backed by lower contract
drilling expenses and interest overhead. The company currently
holds a Zacks Rank #3, which is equivalent to a short-term Hold
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Houston, Texas-based Diamond Offshore Drilling is a major
contract driller, providing comprehensive offshore drilling
services to the global energy industry. The company's drilling
fleet of 46 consists of 32 semi-submersibles, 13 jackups and a
dynamically positioned drillship.
Diamond Offshore currently has two drillships on order, one of
which is expected to be delivered late in the fourth quarter of
2013. The second drillship is expected to be delivered at the end
of the second quarter of 2014. The company's rigs operate in the
Gulf of Mexico (GoM), the U.K. North Sea, South America, Africa,
Australia and Southeast Asia.
We continue to have a favorable view on Diamond Offshore based on
its leverage to the global deepwater markets, attractive yield
and solid backlog position. Going forward, the driller will
likely present investors with solid fundamentals, significant
free cash flow potential and a clean balance sheet, which would
enhance the possibility of further share buybacks and/or special
Diamond aims to increase its footprint in emerging markets (such
as Brazil, Australia and West Africa) to reap benefits from the
recent discoveries of deepwater fields. Again, gradual
improvement in the GoM drilling market (especially post embargo),
along with better bidding activity, will prove beneficial for a
contract drilling company like Diamond Offshore.
However going forward, Diamond expects higher downtime and
operating costs in 2013, which are likely to affect the company's
profitability. Further, the company's decision to reclassify four
cold-stacked rigs as held for sale is likely to restrict the
capacity for upgrades as was in the case of Ocean Apex and Ocean
Also, Diamond is an offshore drilling company, which relies
heavily on the volume of capital expenditure coming from the
exploration and production sector. With the oil and gas price
volatility prevalent currently, this puts downward pressure on
the activity level of the companies.
Finally, we are cautious due to a number of headwinds that all
offshore drillers face, including the execution risk on the
newbuilds, the downtime related to its rigs as well as unexpected
maintenance or damage from hurricanes, which could likely lessen
rig utilization. The company recently revealed that the Ocean
Endeavor and Ocean Patriot will undergo preparation and
maintenance before commencing its new contract.
Other Stocks to Consider
There are other stocks in the sector that however appear more
rewarding. These include
Carrizo Oil & Gas Inc.
Abraxas Petroleum Corp.
Oiltanking Partners, L.P.
), which are expected to perform impressively over the next few
months and carry a Zacks Rank #1 (Strong Buy).