Diamond Offshore Drilling: This Deepwater Driller Has Long-Term Value

May.24.12 | About: Diamond Offshore (DO)

The market continues to treat energy shares, especially oil service providers, quite unkindly. However, the long term demand for these firms is a secular trend as it simply takes more technology to recover each barrel of oil and other fossil fuels as the era of cheap oil is over. One stock is the sector that looks attractive based on valuations and recent catalysts is Diamond Offshore (NYSE:DO).

Revised positives for Diamond Offshore:

  • Two insiders made purchases of new shares last week.
  • In spite of the stock selloff over the last two months, consensus earnings estimates for both FY2012 and FY2013 have actually been nudged up over the past sixty days.
  • On a technical basis, the stock recently crossed over into oversold territory.

4 reasons DO is a solid value stock at $60 a share:

  • The stock is selling at the bottom of its five year valuation range based on P/E, P/B, P/S and P/CF.
  • The company has significantly beat earnings estimates five of the last six quarters and sells for just over 9 times trailing earnings.
  • The stock is cheap at 6 times operating cash flow and has an A- rated balance sheet.
  • The median analysts' price target on DO is $70. S&P just upgraded the shares from "hold" to "buy" last week citing a projected uptick in deepwater dayrates in 2013 which would bode well for DO.

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