Diamond Offshore Drilling Inc. (DO) reported adjusted first quarter 2012 earnings of $1.21 per share, beating the Zacks Consensus Estimate of 98 cents, mainly on account of higher day rates for the company’s deepwater rigs. However, quarterly results decreased from the year-earlier profit of $1.80, due to 3.3% higher operating expenses.
Total revenue in the quarter decreased 4.7% year over year to $768.6 million, surpassing our projection of $754 million.
Dividend Story
Diamond Offshore declared a 75 cent per share special dividend in the quarter, which remained unchanged from the prior quarter. The company will also pay its regular quarterly dividend of 12.5 cents per share (50 cents per share annualized).
Operational Performance
Revenue from the Contract Drilling segment declined 4.3% year over year to $755.2 million, mainly attributable to a 4.2% year-over-year revenue decline in total floaters. These floaters accounted for nearly 94% of the total quarterly contract drilling revenue, while jackups contributed 6%.
Ultra-Deepwater floaters recorded an average dayrate of $364,000 during the quarter, up from $343,000 in the year-earlier quarter. Deepwater floaters realized an average dayrate of $359,000 versus $343,000 in the year-ago quarter. Mid-water floaters recorded an average dayrate of $266,000 during the quarter, down from $275,000 in the year-earlier quarter. Jackup rigs’ dayrates averaged $87,000, up from $82,000 in the first quarter of 2011.
Rig utilization for Ultra-Deepwater floaters increased to 85% from 77% in the year-ago quarter. Utilization for Deepwater floaters improved to 88% during the quarter from 83% in the year-ago quarter. Mid-water category rig utilization was 65%, down substantially from 81% in the comparable quarter last year, while jackup rig utilization decreased to 44% from 47% in the year-earlier quarter.
Financials
As of March 31, 2012, Diamond Offshore had approximately $123.5 million in cash and cash equivalents, while long-term debt stood at $1,495.9 million. The debt-to-capitalization ratio at the end of the quarter was 25.4% (down from about 25.7% in the preceding quarter).
Outlook
Houston, Texas-based Diamond Offshore exhibits long-term earnings growth visibility based on its strong leverage to the offshore deepwater drilling market. Additionally, the company’s significant free cash flow generation potential and healthy balance sheet enhances the possibility of further share buybacks and/or special dividends, going forward.
Diamond’s rival Noble Corporation (NE) reported first quarter 2012 earnings of 47 cents per share, outpacing the Zacks Consensus Estimate of 41 cents, mainly on the back of solid demand for its wide range of rigs and vessels.
We maintain our long-term Neutral recommendation for Diamond Offshore shares, given the volatile oil and gas prices scenario, geopolitical risks associated with international operations and uneven Midwater markets along with the expectation of a gradual decline in Midwater rates. Diamond Offshore currently holds a Zacks #3 Rank (short-term Hold rating).
