Diamond Slips, Cuts Dividend Again - Analyst Blog

Diamond Offshore Drilling Inc. (DO) reported weaker-than-expected second quarter 2010 earnings of $1.61 per share, compared with the Zacks Consensus Estimate of $1.75 and the year-ago profit of $2.79. Total revenue of $822.6 million decreased approximately 13% year over year and 5% from the Zacks Consensus Estimate, mainly due to lower utilization and day rates.

Dividend Story

The ongoing uncertainty triggered off by the Macondo disaster in the Gulf of Mexico (GoM) has hit offshore drillers hard. While Noble Corporation (NE) recently missed our estimate, Diamond lowered its special dividend to 75 cents from $1.375 per share. This is the second time Diamond reduced its special dividend. In the first quarter, the company had reduced the same to $1.375 per share from $1.875. However, the company has maintained its regular quarterly dividend of 12.5 cents per share (50 cents per share annualized).

Management stated that the dividend cut is a prudent step to retain cash, in order to maintain the company’s financial strength and strategic flexibility amid the continuing uncertainty associated with the drilling moratorium in the GoM.

Operational Performance

Due to lower day rates across all categories of rig, contract drilling revenue decreased more than 12% year over year to $811.7 million. The high specification floaters accounted for nearly 42% of the total quarterly contract drilling revenue, while intermediate semi-submersibles and jackups accounted for 48% and 10%, respectively.

High specification floaters recorded an average dayrate of $373,000 during the quarter, down from $381,000 in the year-earlier quarter. Intermediate semi-submersible rigs realized an average dayrate of $269,000, down from $286,000 in the year-ago quarter. Jackup rigs’ dayrates averaged $85,000, down from $146,000 in the second quarter of 2009.

High specification rig utilization was 69% during the quarter, down from 79% in the year-ago quarter. Intermediate category rig utilization was 82%, down from 93% in the year-earlier level. However, jackup rig utilization increased to 76% from 63% in the year-ago quarter.

At the end of the quarter, Diamond had approximately $525 million in cash on hand and $1.5 billion in long-term debt. Debt-to-capitalization ratio at the end of the quarter was about 29%.

Outlook

Diamond is experiencing dayrate pressure in the Deepwater segment, which has not seen a significant increase in tendering activity for projects. Apart from the Ocean Victory, Diamond does not have any ultra-deepwater/deepwater rig up for renewal until 2011. We believe that the decline in renewal contract dayrates from peak levels will continue to affect the company’s results in the near future. Hence, we maintain our Neutral recommendation with Zacks #3 Rank (Hold).