We reiterate our Neutral recommendation on Diamond Offshore Drilling Inc. (DO) following the first quarter 2011 earnings beat. However, fears of a gradual decline in mid-water rates keep us on the sidelines.
The Houston, Texas-based contract driller registered impressive first quarter 2011 results, mainly on account of a lower tax impact as well as better-than-expected revenues. Although total revenue fell 6.2% on an annualized basis, it outpaced our expectation mainly on better utilization.
Diamond is targeting to gain traction in markets, like Brazil and West Africa, in order to reap benefits from rising crude oil prices. Again, the gradual improvement in the drilling market in the Gulf of Mexico, especially after the deepwater drilling ban was lifted by the U.S. administration and better bidding activity expected to prove beneficial for a contract drilling company like Diamond Offshore.
Notably, the company’s recent long-term drilling contract with Anadarko Petroleum Corporation (APC) is expected to generate $1.8 billion in revenues in the future. Diamond’s two ultra-deepwater drillships, Ocean BlackHawk and Ocean BlackHornet, are each contracted with Anadarko for five years and set to roll out in late 2013 and early 2014, respectively.
Diamond’s financial discipline, with a debt-to-capitalization ratio of about 27.2% at the end of first quarter,makes it one of the best-capitalized companies in the industry.
However, the company’s lower-spec deepwater and midwater floater markets leverage will weigh on the stock as we believe utilization and dayrates could dampen over the next couple of years.
The drilling moratorium as well as increased regulations following last year’s Macondo oil spill incident are expected to have an enduring impact on the company. Although Diamond has secured short-term work on its two rigs, we believe the Gulf of Mexico floater market outlook still remains uncertain.
The company, which competes with peers such as Transocean Ltd. (RIG) and Noble Corporation (NE), holds a Zacks #3 Rank (short-term Hold rating).
ANADARKO PETROL (APC): Free Stock Analysis Report
DIAMOND OFFSHOR (DO): Free Stock Analysis Report
NOBLE CORP (NE): Free Stock Analysis Report
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
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