CM in MA

Diamond Offshore: Analysts Must Adjust Estimates Downward

Scott, point taken that DO will probably have EPS estimates taken down. Here are my random thoughts about DO for investors with a long time horizon if DO does decline following any revisions (disclosure: long DO for nearly ten years).

- Coming out of the last recession, DO had negative EPS making EPS multiples a useless metric for a buy point. At that time, DO traded at a low of roughly 3x sales. Chop projected sales in half (too aggressive in my opinion) and one gets a range at the low of $36-$45 at a 3x sales multiple.

- Remember where this company came from. It took its current form through the purchase of distressed assets by Jim Tisch. The Tisch family knows value, and when listening to the conference calls (I do) it comes through that these guys are preparing to get stronger during any future downturns. They didn't follow the merger path after Transocean / Global Santa Fe because they didn't see any significant savings based strictly on size. They haven't chased new builds aggressively. They are waiting and prepared for a downturn.

- The special dividend, now at $7.50 annually, is paid out in quarterly increments providing flexibility to the payouts. The term nature of the contracts in place will provide sufficient cash flow to either continue the special dividend (if only at a reduced level) or, if eliminated, permit that cash to be redirected to buying additional rigs from marginal and/or leveraged companies. This would be in keeping with the company's value-oriented history.

- As with any company with high fixed costs, when times are good the cash flows right to the bottom line. This company rewards shareholders with special dividends, thereby allowing them to quickly recoup part or all of their initial investment while still holding shares. They also are conservative in using cash to take on additional capacity, only doing so when they are certain the long-term profit prospects look good.

So, sure the shares may come down in price. Per your last sentence, investors need to be prepared. That would mean be prepared to pick up shares in a well run company with good prospects. A new investor in DO might not pick the bottom, but they will be highly rewarded when oil goes higher.