Diamond Offshore Drilling: Fleet Analysis As Of July 24 And Second Quarter Results

Aug. 6.14 | About: Diamond Offshore (DO)

Summary

Diamond Offshore Drilling is a solid top-tier offshore driller with a good management team; however, the company presents some fleet weaknesses that need to be tackled soon to stay competitive.

The surprising contract cancellation of the Ocean Vanguard by Statoil, has been a big drag for the Q2 revenue and will impact the next quarter as well.

The jackup market and the floating market, especially, are becoming more challenging and Diamond Offshore will have to adapt to this new financial paradigm.

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Former CEO, Lawrence R. Dickerson retired last quarter, after more than 30 years of service with the company, and has been replaced by Marc G. R. Edwards.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.

Link: Second-quarter results release.

1 - Semi-submersibles, Deepwaters and Midwater

# Name Year Built Specification Contract End

Current day rate

K $

Location
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'

9/14

10/14

12/15

425

-

313

Brazil- South America
7 Ocean Confidence 2001 Ultra-deepwater >7,500'

Maintenance 2/15

- N.Sea/Med/W.Africa
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'

8/14

420

Australia (Indonesia/Total)
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'

01/15

5/15

490

390

GOM-US
5

Ocean Star

1997 Deepwater 5,000' to 7,500' 8/14 310 Brazil- South America
6 Ocean Valiant 1988 Deepwater 5,000' to 7,500'

Available

- N.Sea/Med/W.Africa
7 Ocean Victory 1997 Deepwater 5,000' to 7,500'

Available to 4/15

4/17

-

398

GOM-US

Trinidad

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'

9/14

11/14

7/15

350

265

350

N.Sea/Med/W.Africa
5 Ocean Lexington 1976 Midwater 450' to 5,000'

11/14

2/15

5/18

300

Mob.

160

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'

10/14 maintenance

10/17

-

400.5

Australia
8 Ocean Princess 1975 Midwater 450' to 5,000'

8/14

9/14

11/14 (2)

300

345

230

N.Sea/Med/W.Africa
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'

Available

Termination of contract with Statoil(1)

- N.Sea/Med/W.Africa
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
Click to enlarge

* 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

K $

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
Click to enlarge

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:

Semi-subs Deepwaters Midwaters Jackups Total
*Number of active rigs 13 7 18 6 44
Average age in year 6 16 36 30 22
Idle/stacked 1 2 8 1 12
Click to enlarge

* 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.

2014 2015 2016
Ultra-deep % 87 67 26
Deep-water % 57 39 21
Mid-water % 58 28 12
Jackup % 62 39 11
Click to enlarge

Q2 results snapshot:

Link: 10Q second-quarter.

Q3(Est.) Q2 Q1
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
Click to enlarge

* Just my estimate here.

DO Chart

DO data by YCharts

Commentary:

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.