The market has been a juggernaut so far for 2013. The S&P 500 is up over 15% year-to-date and managing to make record highs even in the face of anemic GDP and weak job creation figures. In this environment, searching for value is like scouring the desert for water.
The question becomes, where is actual growth occurring, while also being overlooked? Energy stocks have been entrenched in bear territory for a couple of years now. Weakening economic conditions have decimated the commodities market and kept the energy sector limited to single digit gains, greatly under-performing the S&P 500 for 2013. The return of $100 oil however, sets the stage for a comeback.
Over 40% of all new oil discovered in the past decade has been found in association with deepwater drilling operations. According to a recent study by Wood Mackenzie, investments in deepwater drilling could grow from $43 billion as of 2012 to $114 billion within a decade. Nearly 190 new rigs are expected to come online in the next few years as new technologies make deepwater drilling a more efficient venture.
Diamond Offshore (DO) is a deepwater and ultra-deepwater driller that recently reported earnings of $1.33 per share - beating estimates for the eighth quarter in a row. Their fleet currently consists of 44 offshore drilling rigs with four ultra-deepwater drill-ships commencing operations by 2014. Diamond's global presence means it has rigs situated around the world with operations in emerging markets like West Africa and Brazil. With the company's cost of operations hovering around $72 a barrel for crude, higher oil prices are creating further opportunities for growth
Diamond has a market capitalization of $9.5 billion, making them a small deepwater driller next to some of their competitors, for example Transocean (RIG), which has a market cap of $17 billion. Smaller size gives them more room to grow, a fact that is often overlooked by analysts. During economic hardships, an operating margin of 32.9% as compared to the industry average of 18.6%, gives Diamond significant leverage in order to maintain positive earnings.
Looking deeper into the company's fundamentals suggests significant value in the stock. Diamond Offshore's Return on Assets is triple that of their competitors at an impressive 9.7, a nod to management's effectiveness in choosing how to position their investments. The deepwater drilling industry is capital-intensive, so knowing how to profit off of property and equipment is vital to their financial health. They're also attractive on a Price to Earnings level, currently hovering around 13.5 - compared to the industry average of 18.6.
Future growth is where Diamond stands out for potential investors. Expected earnings for 2014 come in at $6.81 a share, representing a shocking 39% increase in 16 months. Assuming current P/E levels stay the same, it pegs Diamond's price target at around $91. In an industry where expected growth over the next 5 years is 12%, Diamond Offshore presents an attractive opportunity to get into deepwater drilling.