On Aug 20, 2014, we issued an updated research report on
Diamond Offshore Drilling Inc.
), a major contract driller, providing comprehensive offshore
drilling services to the global energy industry.
The company's second-quarter earnings surpassed the Zacks Consensus
Estimate but revenues lagged the same. The results primarily
benefited from higher dayrates. The company posted an earnings beat
in all of the last four quarters with an average earnings surprise
Diamond Offshore Drilling is believed to have solid fundamentals
with significant free cash flow potential and a clean balance
sheet, which enhances the possibility of further share buybacks
and/or special dividends in the years ahead. As of Jun 30, 2014,
Diamond Offshore Drilling had approximately $980.8 million in cash
and cash equivalents, while long-term debt was $2,244.3 million.
The company is aiming to increase its footprint in the emerging
markets (such as Brazil, Australia and West Africa) to reap
benefits from the recent discoveries of deepwater fields. Again, a
gradual improvement of the drilling market in the Gulf of Mexico
(especially after the deepwater drilling ban was lifted), along
with better bidding activity, will prove beneficial for a contract
drilling company like Diamond Offshore.
Given oil's strong long-term fundamentals, the long lead times of
deepwater projects, and the limited slack in the global deepwater
drilling fleet, we do not expect any significant impact on
dayrates. As a premium deepwater drilling contractor, Diamond
Offshore Drilling enjoys strong leverage to this relatively
favorable outlook. Per the latest fleet status report, Ocean
Princess and Ocean Onyx received contracts. These contracts
indicate that there is still scope of work for older rigs.
However, Diamond Offshore Drilling expects delayed start-up of
newbuilds, increased downtime for some of its rigs and higher
operating costs in 2014, which will likely affect the company's
profitability. Further, Diamond Offshore Drilling'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 Onyx.
Other Stocks to Consider
At present, Diamond Offshore Drilling carries a Zacks Rank #3
(Neutral). Better-ranked stocks in the same industry include
Weatherford International plc (
), Sunoco Logistics Partners L.P (
) and Sanchez Energy Corp (
). All of these stocks sport a Zacks Rank #1 (Strong Buy).
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