Diamond Offshore Drilling (NYSE:DO)
(Click to enlarge)
Source: Ocean BlackHawk.
Complete fleet analysis as of September 16, 2014.
1 - Semi-submersibles, Deep Waters and Midwaters.
| # | Name | Year Built | Specification | Contract End | Day rate K $ | Location |
| UDW Drillships. | ||||||
| 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' | Q1/15-Q1/20 | 495 | GOM-US |
| 4 | Ocean Black Lion | 2015 | Ultra-deepwater >7,500' | Q2 2015 | - | - |
| 5 | Ocean Black Rhino | 2014 | Ultra-deepwater >7,500' | Q1/15-Q4/15 | 550 | - |
| 6 | Ocean Clipper | 1997 | Ultra-deepwater >7,500' | 10/14 10/14-11/1411/14-12/15 | 425 Mob. 313 | Brazil South America |
| 7 | Ocean Confidence | 2001 | Ultra-deepwater >7,500' | Maintenance 2/15 Available | - - | 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' | 4/15 4/15-3/16 +1y option | BOP Recert. 425 | Australia |
| 11 | Ocean Great White | 2016 | Ultra-deepwater >7,500' | H2/16-H2/19 | 585 | - |
| 12 | Ocean Rover | 2003 | Ultra-deepwater >7,500' | 03/16 | 465 | Australia |
| 13 | Ocean Valor | 2009 | Ultra-deepwater >7,500' | 10/15 | 440 | Brazil South America |
| Deepwater rigs. | ||||||
| 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 +1y option | 475 | Australia |
| 3 | Ocean Apex | 2014 | Deepwater 5,000' to 7,500' | Q4/14-Q1/15 | 485 | Vietnam |
| 4 | Ocean Onyx | 2013 | Deepwater 5,000' to 7,500' | 01/15 1/15-5/15 | 490 390 | GOM-US |
| 5 | Ocean Star | 1997 | Deepwater 5,000' to 7,500' | Available | Transfer To GOM | 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 4/15-4/17 | - 398 | GOM-US Trinidad |
| Midwater rigs. | ||||||
| 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' | 10/14 12/14 7/15 | 350 265350 | N.Sea Med W.Africa |
| 5 | Ocean Lexington | 1976 | Midwater 450' to 5,000' | 12/14 1/15 4/15 4/18 | 300 300 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' | 9/14 12/14 | 345 230 | N.Sea Med W.Africa |
| 9 | Ocean Quest | 1973 | Midwater 450' to 5,000' | 4/15 | 199 | Australia |
| 10 | Ocean Saratoga | 1976 | Midwater 450' to 5,000' | Available | - | GOM-US |
| 11 | Ocean Vanguard | 1982 | Midwater 450' to 5,000' | Available | - | 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 | 257 | Brazil South America |
| 15 | Ocean Yorktown | 1976 | Midwater 450' to 5,000' | 3/15 | 184 | GOM Mexico |
| Cold Stacked rigs. | ||||||
| 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 |
2 - Jackups.
# | Name | Year Built | Specification | Contract End | Current day rate K $ | Location |
| 1 | Ocean King | 1996 | Jackup 0' to 450' | 09/14 | 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 |
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 rigs | 13 | 7 | 18 | 6 | 44 |
| Average age in year | 6 | 16 | 36 | 30 | 22 |
| Idle/available/warm stacked | 2 | 3 | 4 | 1 | 10 |
| Cold stacked | 0 | 0 | 3 | 0 | 3 |
* 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.
| 2014 | 2015 | 2016 | |
| Ultra-deep % | 87 | 67 | 26 |
| Deep-water % | 57 | 39 | 21 |
| Mid-water % | 58 | 28 | 12 |
| Jackup % | 62 | 39 | 11 |
Commentary:
Diamond Offshore is one of the top-tier offshore drillers with a versatile rig fleet of floaters and jackups, as well. My analysis will focus on the fleet status, and I will not comment on the actual balance sheet because, and It is better to wait until the third-quarter is effectively released.
One main critic whom many analysts and investors keep repeating when it comes to the company's rig fleet, is the fact that Diamond offshore has an aging and not really efficient fleet compared to its peers. This fact which is questionable of course, is clearly evident with the midwaters and jackups segment with an average over 30-year whereas the UDWs and semi-submersibles are presenting a better picture overall.
The whole industry is actually facing a lot of pressure, that can be presented in a few points:
- Oversupply of floater and jackup rigs coming on-line, until late 2015.
- Reduced capital expenditure in the offshore drilling sector by the big-oil operators.
- Political tensions worldwide and particularly, economic sanction imposed by the USA and EU against Russia for its involvement in Ukraine.
- Rapid drop in crude oil price, trading now in the low 90s.
- New characteristics (BOP dual stacks and 1,250T drilling capability) required by operators worldwide, pushing older rig generations to a rapid obsolescence or a certain challenging competitive future.
This current condition is creating a lot of competitions, and day-rates are going down even for the high specification 6th generation rigs. This widespread situation is more acute with the floater rig's segment than the jackup rig's segment.
Offshore drillers are experiencing now, a high number of 5th generation rigs rolling off contract; many of which will not be able to renew a contract due to the new operators' requirements.
Let's look at the US GOM location, for example; the operators are requiring now dual stacks and 1,250 ton capability to drill the lower tertiary type wells they have on their books. These recent and more stringent requirements are pushing many offshore drillers to relocate the older rigs, which rolled off contract, to different and more suitable markets, and are putting more pressure on other's locations as West Africa, Brazil, etc.
This overall weakness of the 3rd, 4th and 5th generation floaters has a negative effect on the 6th and even 7th generation, as well. Rates are moving down, between $450k to $525k depending on location. The industry is feeling the full effect of the day-rate bifurcation between the older generations and the new-generation rigs. This trend will continue until the end of 2015 probably.
Moreover, it seems that the demand for dual stacks rigs moved from GOM to West Africa, Angola (pre-salt) and now worldwide, because those rigs are more efficient and have capabilities to stay longer on location and thus are much more economical for operators.
The company jackups segment is not as important as the floaters segment. The jackups sector is not suffering as much beside the SouthEast Asia location, which is the closest to where the rigs are actually built. For the High specification jackups offshore drillers are still experiencing a decent day-rate around $150k to $155k versus $160k to $165k a year ago.
Diamond Offshore seems to lag behind its peers, when we evaluate its rig fleet in this new market paradigm. Clearly, the company will have additionally problems to contract its aging fleet, in my opinion, and revenue may suffer quite rapidly until mid-2015.
This situation is particularly acute with the midwaters which are almost obsolete. The company has 18 midwater rigs at the moment, with 3 rigs already cold stacked and three available. This amount may increase significantly by mid-2015. It is probable that Diamond offshore may have to spin off a part of its aging fleet, like Noble (NE) did recently?
The stock price followed the whole offshore industry and tumbled over 35% since January.
Analyst Brad Handler from Jefferies released yesterday an article about this specific problem and sees some difficult times ahead for Diamond and Transocean, notably. The analyst remain cautious on the group in general.
YTD chart:
The question is always the same, when will DO reach a meaningful bottom?
It is possible that the offshore drillers, in general, may have dropped to a new support now, if the price of crude oil finally stabilizes? We will have to monitor the oil price for a few weeks.
I cannot really recommend Diamond Offshore as a long investment due to its fleet nature, and I have a HOLD rating right now, despite a much lower price per share. I believe few other offshore drillers like Seadrill Ltd. (SDRL) Ensco Plc. (ESV) and Transocean Ltd. (RIG) are a better choice. Nonetheless, I believe it is a good opportunity between $34+ and $42, and I will trade the stock depending on my cash availability.
YTD comparison with RIG, SDRL, ESV:
