Diamond Offshore: All You Need To Know About The Second Quarter

| About: Diamond Offshore (DO)

Summary

DO released earnings results for 2Q'16, and it was another weak quarter with revenue of $388.75 million, down 17.4% quarter over quarter.

DO has outperformed the sector due to its excellent balance sheet, whereas its fleet cannot be considered as one of the best in the offshore drilling sector.

I recommend DO as a hold.

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Picture: Ocean BlackHawk courtesy of Drillingcontractor.

This article is an update of my preceding article on Diamond Offshore Drilling (NYSE:DO) published on May 3, 2016.

Q2 2016 Results Snapshot. (7 Quarters.)

Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014

Total revenues

$ million

388.75 470.54 555.6 609.7 634.0 620.06 675.3

Contract drilling expense

$ million

357.41 212.84 256.39 277.94 342.87 350.66 358.7

Impairment charge after tax

$ million

612 0 499.37 2.55 0 358.53 0

After-tax net Income

$ million

(589.94) 87.43 (245.38) 136.4 90.39 (255.71) 98.8

G&A

$ million

18.14 15.40 15.6 16.9 16.5 17.45 19.9

Cash on hand and marketable securities

$ million

103.34 134.06 130.55 141.13 111.81 184.8 233.62

Long-term debt

$ million

1,980.3 1,980.1 1,994.8 1,995 1,995 1,995 1,9945

Earnings per share

$

(4.30) 0.64 (1.79) 0.99 0.66 (1.86) 0.72

Adjusted Earnings per share

$

0.16 0.64 0.89 - - - -

Dividend

$/share

0 0 0 0.125 0.125 0.125 0.125

Shares Outstanding

million

137.2 137.206 137.159 137.20 137.16 137.15 137.21
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Mr. Marc Edwards, CEO, said in the conference call:

Diamond Offshore posted a loss of $4.30 per share including special charges of $612 million. Adjusting for these items, earnings per share was $0.16 in the second quarter. Kelly will address the special items in his prepared remarks. This compares to $0.64 reported in the first quarter of 2016. Earnings during the quarter were significantly impacted by four unscheduled subsea stack pulls on three of our Black ships currently operating in the Gulf of Mexico.

Part 1 - Fleet Status as of 8/1/2016.

Revenue Per Rig Segment (7 consecutive quarters).

Segment

Q2 2016

in $ millions

Q1 2016

in $ millions

Q4 2015

in $ millions

Q3 2015

in $ millions

Q2 2015

$ millions

Q1 2015

$ millions

Q4 2014

$ millions

Floaters UDW 214.10 325.96 395.80 376.20 315.67 251.4 182.7
Deepwater 67.19 59.12 92.13 136.67 181.10 138.8 115.8
Mid-water 56.69 47.67 44.77 69.50 96.93 176.4 231.9
Jackups 19.42 10.77 11.44 16.67 23.74 33.1 40.7
TOTAL 357.41 443.52 544.13 599.04 617.44 599.6 674.4
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Average Dayrate Comparison Quarter to Quarter in 2016.

Q2 2016 Q1 2016

Average day-rate

$K

Ut.

%

Oper.

efficiency

%

Average day-rate

$K

Ut.

%

Oper.

efficiency

%

Floaters

UDW

452 47 86.7 533 61 98.4
Deepwater 301 35 100 334 28 97.1
Mid-water 313 30 99.4 263 25 97.7
Jackups 335 13 100 118 18 100
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Fleet Status as of 8/1/2016.

DO 8/1/2016 2016 2017 2018 2019 2020 day rate
DS Ocean BlackHawk 5 12 12 5,5 0 495
DS Ocean BlackHornet 5 12 12 12 3,5 495
DS Ocean BlackLion 5 12 12 12 1,5 400
DS Ocean BlackRhino 0 12 12 12 0,2 400
Drillship 15 48 48 41,5 5,2
Ocean Courage 5 12 12 12 6,8 420
Ocean Monarch 5 0,3 0 0 0 390
Ocean GreatWhite 3 12 12 7 0 585
Ocean Valor 5 12 9,5 0 0 455
SemiSub 18 36,3 33,5 19 6,8
DW Ocean Apex 5,3 11 0 0 0 285
DW Ocean Valiant 0,3 0 0 0 0 140
DW Ocean Victory 5 4,2 0 0 0 398
Deepwater 10,6 15,2 0 0 0
MidW Ocean Ambassador 0 0 0 0 0 115
MidW Ocean Guardian 5 2,2 0 0 0 220
MidW Ocean Patriot 5 9,8 0 0 0 400,511
Midwater 10 12 0 0 0
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Noticeable changes:

  1. DO elected to cold stack the Ocean Endeavor and Ocean Scepter.
  2. DO intends to scrap the Ocean Quest and Ocean Star.
  3. The Semisubmersible GreatWhite is scheduled to commence its contract late 4Q'16
  4. As of June 30, 2016, the company's total contracted backlog was $4.4 billion, which represents 28 rig years of work. Approximately 86% of the company's available ultra-deepwater rig days for the remainder of 2016 are contracted with top tier customers.
  5. The Ocean Valiant has been extended until mid-August 2016, with a second option well.
  6. The BlackRhino will start its contract with Hess early January 2017.
  7. DO has now 15 cold stacked rigs and 2 retired.
  8. Ocean Apex was awarded a 3-month extension, in a blend & extend deal.
  9. DO has no more Jackup working now.

Part II - Commentary and analysis:

DO released its earnings results for 2Q'16, and it was another weak quarter with a revenue of $388.75 million, down 17.4% quarter over quarter. Adjusted net income was $22.30 million or 0.16 per share.

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One big item that impacted 2Q was the impairment charges and related taxes of $612 million, or $4.46 per diluted share, primarily relating to the carrying value of eight semi-submersible rigs and associated inventory.

The revenues were impacted, in part, by many technical problems the four Drillships experienced recently and the subject has been discussed at the 2016 West Coast Energy Conference On June 21, 2016. Here is a personal transcript of the conference.

We actually had four un-plan stacks poles, on my bop this quarter. When I have a non-plan stack pole, I go to zero revenue, and I think in some of my earlier commentary around what the stack pole actually means, its 14 to 21 days that multiply by four in 0 revenue, it is natural for me, yes it is.

Is it material for my clients? Absolutely. Because, never mind the day rate they don't have to pay me, they still have the spread costs, they got the deferred oil, so they are losing a $600K/day to $800K/day.

I am not getting paid my revenue, but now I need to un-plan stacks poles, and we feel the financial pain, as well, and it is unique to the industry, we are the first to do this, but now the door is closed to everybody else.

Also, Marc Edwards indicated the deal with Trelleborg about the new innovative Helical Riser Buoyancy design. This issue has been explained in detail at the conference aforementioned earlier.

During the quarter, we announced a joint development agreement with Trelleborg on our new innovative Helical Riser Buoyancy design. Under this agreement, Diamond has licensed the technology to Trelleborg. And in return, we will work with them to further develop, test, manufacture and market the Buoyancy Riser Technology. This new buoyancy design will reduce riser drag and help mitigate vortex-induced vibrations which is common in high current environment such as the Gulf of Mexico.

This new technology has some potential down the road, however, we need an oil recovery first. The system requires a long-term commitment (three-year contract) which is not what O&G companies want to invest in at the moment.

I noticed that Diamond Offshore has decided to cold stack the entire idle fleet comprised of 15 rigs, right now. This is a good move considering the market situation and the company will save a significant amount of cash.

Conclusion:

DO has outperformed the sector due to its excellent balance sheet whereas its fleet cannot be considered as one of the best in the offshore drilling sector. A simple look at the FSR shows 15 cold stacked rig and two retired for 13 rigs working.

The company has no real debt problem and is quite unique in this sensible aspect. However, the deeper we navigate through this offshore bear cycle, and the harder it will be for DO to remain solid, especially due to the nature of its aging fleet.

I believe the company has reached recently an inflexion point, showing that the quality of the fleet will take precedence over the balance sheet strength, starting now.

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This is the reason why DO is about to under-perform the offshore drilling sector, in my opinion, unless the company takes steps to acquire new revenue producing assets very soon, at nearly distressed prices.

The task is not an easy one because the offshore drilling market is not offering decent "working" rigs that can be considered as "worth the money."

The basic deal is now about idle rigs for the next 12 to 18 months and it is certainly not appealing to the company.

The potential may be found through a merger probably under an all stock swap? I can see a few potentials from Vantage drilling to Pacific Drilling but it is too early to speculate.

I recommend DO as a hold.

Important Note: Do not forget to become one of my followers for DO and the entire offshore drilling industry. Thank you.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.