We are downgrading our recommendation for Diamond Offshore (DO) shares to Underperform from Neutral. Though the recent contract awards by Brazil’s Petrobras highlight the company’s focus on building backlog, a tentative near-term outlook for contracting activity, declines in dayrates for new contracts, a weak utilization rate and the company’s unfavorable cost guidance are likely to further weigh on the stock.
Diamond is the most exposed driller to the midwater drilling market and the special dividend ($1.875 per share) will likely be difficult to sustain as midwater rates deteriorate in the coming quarters. We also believe that total operating expenses will likely increase at a faster pace than revenue in 2010 due mainly to a low utilization rate.
Our $76 price objective is based on 8.8X our 2010 P/E estimate.Zacks Investment Research
