Will Diamond Offshore (DO) Beat Q3 Earnings Estimates? - Analyst Blog

Leading oil and gas drilling contractor, Diamond Offshore Drilling Inc. ( DO ), is expected to report its third-quarter 2014 earnings on Thursday, Oct 23, before the opening bell. Let's see how things are shaping up prior to the announcement.

In the last quarter, the company's earnings of 66 cents per share surpassed the Zacks Consensus Estimate of 58 cents. The outperformance was mainly backed by higher mid-water and jackup rig utilization. However, the quarter's results decreased 50.4% from the year-earlier earnings of $1.33 per share.

Why a Likely Positive Surprise?

Our proven model shows that Diamond Offshore is likely to beat earnings this season because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.28%. This is a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Diamond Offshore currently carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank of #1, 2 or 3 have a significantly higher chance of beating earnings. Conversely, Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

Diamond Offshore's Zacks Rank #3 and positive ESP make us reasonably confident of a positive earnings beat.

What is Driving the Better-than-Expected Earnings?

Diamond Offshore in particular and offshore drillers in general have in the recent past witnessed idled rigs, shrinking dayrates and lack of new contracts. However compared to its peers like Hercules Offshore Inc. ( HERO ) and Transocean Ltd. ( RIG ), Diamond Offshore was able to uphold investor confidence. This is due to the company's focus on core businesses, improving cost structure and reduction of debt in the quarter.

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, Diamond Offshore Drilling had approximately $980.8 million in cash and cash equivalents, while long-term debt was $2,244.3 million.

The company 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, a gradual improvement in the Gulf of Mexico drilling market (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 the strong long-term fundamentals of oil, 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.

Stock to Consider

Here is another energy firm you may want to consider as our model shows that it has the right combination of elements to post an earnings beat this quarter:

Delek Logistics Partners, LP ( DKL ) with Earnings ESP of +5.56% and Zacks Rank #1 (Strong Buy).

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HERCULES OFFSHR (HERO): Free Stock Analysis Report

DELEK LOGISTICS (DKL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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