Diamond Offshore Drilling: A Well-Positioned Gem

| About: Diamond Offshore (DO)

There are a number of offshore drillers including Transocean (NYSE:RIG), Diamond Offshore (NYSE:DO), ENSCO International (NYSE:ESV), GlobalSanteFe (NYSE:GSF), Noble Corporation (NYSE:NE) and TODCO (THE). The two largest of these companies are Transocean and Diamond Offshore. While RIG is the larger of the two companies, both of these offshore drillers have many similarities. They are global in the location of their rigs, they are the primary deep-water offshore drillers in the world, and they are both highly profitable.

These companies have moved a number of their rigs out of the Gulf of Mexico, both to avoid the potential hurricanes and also due to the fact that the fees for these rigs are much higher in other parts of the world. Diamond Offshore has rigs in Indonesia, the Middle East, North Africa, Australia, the North Sea, and any place where the major oil companies have located significant deposits of offshore oil.

The statistics on Diamond Offshore are impressive. They are a $15 billion dollar company, with a large well-run parent company Loews (LTR). Diamond Offshore has a profit margin greater than 35% and analyst’s estimate that profits should increase by approximately 60% in the next year. The stock sells for less than 9 times forward earnings and has enjoyed spectacular growth in net income (a more than 5 fold increase from 2004 -2006)

Reasons for the growth estimates include the limited number of rigs that are available, the fact that some of the larger and more complex rigs command daily leasing fees of greater than $300,000 and the fact that the percentage of existing rigs leased is extremely high. In fact 70% of the new rigs that are scheduled to be completed in 2010 already have multi-year leases upon completion.

While deep-water drilling is technically difficult, potentially dangerous, and extremely challenging, DO is a company who understands this business well. With the growing need for oil, the shortage of oil platforms, and the fact that most of the newer major offshore oil discoveries seem to be located in deeper waters, this company is well positioned for a world with its ever increasing need for oil. I currently have a long position in DO.

DO 5-yr chart