Diamond Offshore Drilling (NYSE:DO)
Source: Ocean Endeavor. Diamond Offshore Drilling website.
Diamond Offshore provides drilling services to global energy industries, particularly oil companies. The current company was founded in 1989, but can be traced to 1953, when Odeco's Alden Laborde developed the first semi-submersible rig. Odeco, founded in New Orleans, Louisiana, was purchased by Diamond Drilling. It specializes in offshore drilling in regions such as the North Sea and Gulf of Alaska. The company employs around 5,500 employees worldwide, and has three regional offices in Australia, Brazil and Scotland.
It has a fleet of 44 drilling rigs, including five rigs under construction. Its fleet consists of 33 semi-submersibles, two of which are under construction, five dynamically positioned drillships, three of which are under construction, and six jackups. The midwater Ocean New Era, Ocean Epoch and Ocean Whittington are for sale. The jackup Ocean Spartan is also for sale. Actual backlog is $6.24 billion.
Former CEO, Lawrence R. Dickerson retired last quarter, after more than 30 years of service with the company, and has been replaced by Marc G. R. Edwards. Mr. Edwards has spent most of his career with Halliburton (NYSE:HAL). The new CEO has been in place for a full quarter now.
G.R Edwards, CEO, said in the last conference call on July 24:
That continues to be a lot of market commentary around the edge of our fleet, but not enough around the quality. In Q2, our entire fleet experienced only 53 days of unplanned downtime. This is the best quarterly reliability figure we have delivered in more than 7 years. In Q2, our entire fleet experienced only 53 days of unplanned downtime.
An important comment that characterizes this offshore drilling company.
The company was founded in 1989, and is headquartered in Houston, Texas. Diamond Offshore Drilling, Inc. is a subsidiary of Loews Corporation.
Complete fleet analysis as of July 23, 2014.
More information has been added after the conference call on July 24, 2014.
1 - Semi-submersibles, Deepwaters and Midwater
|#||Name||Year Built||Specification||Contract End||
Current day rate
|1||Ocean Baroness||2001||Ultra-deepwater >7,500'||9/15||277||Brazil- South America|
|2||Ocean Black Hawk||2014||Ultra-deepwater >7,500'||5/19||495||GOM-US|
|3||Ocean Black Hornet||2014||Ultra-deepwater >7,500'||Q3/14-Q3/19||495||GOM-US|
|4||Ocean Black Lion||2015||Ultra-deepwater >7,500'||Q2 2015||-||-|
|5||Ocean Black Rhino||2014||Ultra-deepwater >7,500'||Q4 2014||
550(2Y) or 485 (3Y) (5)
|6||Ocean Clipper||1997||Ultra-deepwater >7,500'||
|Brazil- South America|
|7||Ocean Confidence||2001||Ultra-deepwater >7,500'||
|8||Ocean Courage||2009||Ultra-deepwater >7,500'||2/15||407||Brazil- South America|
|9||Ocean Endeavor||2007||Ultra-deepwater >7,500'||12/15||521.7||N.Sea/Med/W.Africa|
|10||Ocean Monarch||2008||Ultra-deepwater >7,500'||
|11||Ocean Great White||2016||Ultra-deepwater >7,500'||H2/16-H2/19||585||(NYSE:BP)?|
|12||Ocean Rover||2003||Ultra-deepwater >7,500'||03/16||464||Australia|
|13||Ocean Valor||2009||Ultra-deepwater >7,500'||10/15||440||Brazil- South America|
|1||Ocean Alliance||1988||Deepwater 5,000' to 7,500'||6/16||367.1||Brazil- South America|
|2||Ocean America||1988||Deepwater 5,000' to 7,500'||5/15||475||Australia|
|3||Ocean Apex||2014||Deepwater 5,000' to 7,500'||Q1/15||485||Vietnam|
|4||Ocean Onyx||2013||Deepwater 5,000' to 7,500'||
|1997||Deepwater 5,000' to 7,500'||8/14||310||Brazil- South America|
|6||Ocean Valiant||1988||Deepwater 5,000' to 7,500'||
|7||Ocean Victory||1997||Deepwater 5,000' to 7,500'||
Available to 4/15
|1||Ocean Ambassador||1975||Midwater 450' to 5,000'||03/16||211.5||GOM-Mexico|
|2||Ocean Concord||1975||Midwater 450' to 5,000'||6/15||248||Brazil- South America|
|3||Ocean General||1976||Midwater 450' to 5,000'||Available||-||Australia|
|4||Ocean Guardian||1985||Midwater 450' to 5,000'||
|5||Ocean Lexington||1976||Midwater 450' to 5,000'||
|Brazil- South America|
|6||Ocean Nomad||1975||Midwater 450' to 5,000'||8/15||330||N.Sea/Med/W.Africa|
|7||Ocean Patriot||1983||Midwater 450' to 5,000'||
|8||Ocean Princess||1975||Midwater 450' to 5,000'||
|9||Ocean Quest||1973||Midwater 450' to 5,000'||1/15||199||Australia|
|10||Ocean Saratoga||1976||Midwater 450' to 5,000'||Available||-||GOM-US|
|11||Ocean Vanguard||1982||Midwater 450' to 5,000'||
Termination of contract with Statoil(1)
|12||Ocean Winner||1976||Midwater 450' to 5,000'||3/15||283.5||Brazil- South America|
|13||Ocean Worker||1982||Midwater 450' to 5,000'||2/15||283.5||Brazil- South America|
|14||Ocean Yatzy||1989||Midwater 450' to 5,000'||10/14 (6)||257||Brazil- South America|
|15||Ocean Yorktown||1976||Midwater 450' to 5,000'||Warm stacked||-||GOM-Mexico|
|1||Ocean Epoch||1977||Midwater 450' to 5,000'||For sale||-||Cold stacked|
|2||Ocean New Era||1974||Midwater 450' to 5,000'||For sale||-||Cold Stacked|
|3||Ocean New Whittington||1974||Midwater 450' to 5,000'||For sale||-||Cold Stacked|
* Conference call 6 important comments about the Q2 contracts:
(1) A nonrecurring item that had a significant negative impact on results for the quarter was the termination of the Ocean Vanguard contract by Statoil. As its basis, the canceling the contract, Statoil has claimed that the rig is not in compliance with certain customer-specific technical requirements. Even though the rig has a long history of successful performance in Norway.
(2) Last night, we announced, in the rig status report, that we signed the Ocean Princess to a 1 well job at a rate of $230,000 per day, which was lower than some were expecting. Certainly, this is an aggressive rate in order to keep the rig working but I would not necessarily view this as a new benchmark day rate.
(3) So let me now say a few words regarding Brazil. We have been in discussions with Petrobras regarding contract extensions on the ultra-deepwater semis, the Courage, Valor and the Baroness. We have concluded the pricing negotiations and we are close to being able to announce these. However, we are still waiting final approval from the relevant stakeholder. And when ready, we will announce these contracts accordingly in our Rig Status Report.
(4) During Q2, we secured a 3-year term for the Ocean Lexington, an SS-2000 rig that is one of the more mature assets in our fleet. This picture illustrates that well maintained second-generation units can remain marketable.
(5) The bigger news, with respect our fleet, is that we have negotiated with our customer, Murphy, a $550,000 per day contract that enables the Rhino to take outstanding backlog, with the added option to convert the contract into a multiyear term at a rate of either $485,000 per day for 3 years, or $500,000 for 2.
(6) Revenues were also negatively impacted by both the delay in the Ocean BlackHawk, which reported only 17 days of revenue in Q2 and additional downtime for surveys incurred for the Ocean Yatzy and the Ocean Alliance in quarter. The Yatzy was down for 41 days as its survey was moved forward into Q2 after being projected to be down in Q3. Alliance was down 81 days for its survey during the quarter, which due to weather and shipyard delays, was 30 days longer than anticipated.
2 - Jackups.
|#||Name||Year Built||Specification||Contract End||
Current day rate
|Previous day rate|
|1||Ocean King||1996||Jackup 0' to 450'||08/14||130||GOM-Mexico|
|2||Ocean Nugget||1976||Jackup 0' to 450'||08/16||97||GOM-Mexico|
|3||Ocean Scepter||2008||Jackup 0' to 450'||3/16||158||GOM-Mexico|
|4||Ocean Spur||1981||Jackup 0' to 450'||4/15||30||Brazil- South America|
|5||Ocean Summit||1972||Jackup 0' to 450'||05/15||86||GOM-Mexico|
|6||Ocean Titan||1974||Jackup 0' to 450'||Warm stacked||-||GOM-Mexico|
|7||Ocean Spartan||1980||Sold during 2Q 2014||$8 million gain on sale|
Analysis of the fleet:
The fleet can be divided into four groups, and I will use the numbers above to calculate the age of each sector on average:
|*Number of active rigs||13||7||18||6||44|
|Average age in year||6||16||36||30||22|
* Including the new rigs.
Future third-quarter fleet highlight discussed at the conference call:
- The company expects the Ocean Valor and the Ocean Concord to incur downtime and additional cost related to their 5-year surveys. With an additional $15 million to $20 million extra-expense.
- Ocean Patriot and Ocean Confidence expenses will be capitalized and deferred in the third quarter.
- Ocean BlackRhino will be operating the entire third-quarter Q3, thereby it was operating only the final portion of Q2. This will also increase cost.
- The Ocean Endeavor will recognize a full-quarter operating cost in Q3.
- Ocean Clipper and Ocean Monarch will also have an incidence in operating cost because they are returning to operation.
Q3 contract drilling expense will be between $410 million to $430 million or about 6% higher than Q2.
Percentage of rig days committed by year as of July 23, 2014.
Q2 results snapshot:
Link: 10Q second-quarter.
|Contract drilling revenue in $ million||*640/670||650||685.8|
|Contract drilling expense in $ million||410/420||395||369|
|After-tax net Income in $ million||-||89.7||145.8|
|Interest expense in $ million||15/20||18.5||18.2|
|G&A in $ million||18/21||20.5||22.8|
|Tax rate in %||20/24||20.3|
|Backlog in $ billion||-||6.24||6.8|
|Earnings per share||-||0.65||1.05|
* Just my estimate here.
Diamond offshore drilling is a top-tier offshore driller with a good management that has shown discipline and efficiency. I have confidence that this management under the new CEO will be able to overcome the challenges lying ahead.
The second-quarter was not particularly positive, due to some unexpected events and a surprising contract cancellation by Statoil involving the Ocean Vanguard, which will have unfortunately some ripple effects throughout the rest of 2014.
The floater market, in particular, presents a definitive weakness due to two strong headwinds:
- A large over-supply of new rigs coming on-line.
- A temporary reduction of capital expenditure by the big oil companies.
The jackup market, on the other hand, offers a better outlook overall, however, it is confronted by the same headwinds indicated above, until the end of 2015.
Marc Gerard Rex Edwards, CEO said:
So stepping up to the offshore semi and drillship market general, well, we cannot predict where future day rates are headed. But we feel the market is likely to have oversupply of rigs throughout 2015 and into 2016. As I mentioned on the last call, we have had a warm wind on our backs over the past few years, but choppy waters do lie ahead for the short term. We all understand the challenges facing our clients with regard to their immediate needs to address shareholder returns and reigning expenditures. We believe, these will be short-term drivers and our clients will ultimately have to return to prioritizing production and reserve replacement as project economics benefit from the correction in supply chain costs moving forward.
My biggest concern is that Diamond Offshore owns a large and old mid-water and jackup fleet, which is becoming increasingly obsolete in this new economic paradigm, and the company will have to act soon to adapt to the market modern requirements.
One solution could be a spin-off of the older rigs as Noble Drilling (NYSE:NE) did with Paragon Offshore (PGN) recently. Nonetheless, there is still a residual value in these rigs as we have seen with the contract of the Ocean Lexington recently.
I am rating DO an HOLD/accumulate because I believe the stock price has suffered a recent important haircut which offers some new value opportunity from a long investor's perspective.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.