Diamond Offshore: Street Looks Past Results


  • Diamond Offshore beat expectations, but I believe only cost and cash management is worth (timidly) celebrating.
  • The long-awaited inflection point in the offshore drilling space, at least in what pertains to observable financial impact, seems to be out of sight.
  • Absent irrefutable signs of macro improvement, I still find investing in offshore drilling too risky for my taste.

Earnings season continues for offshore drillers, with Diamond Offshore (NYSE:DO) topping revenues and earnings expectations this Monday morning. But despite the beat and the immediate positive market reaction to the numbers (the stock was up 13% pre-market at one point), I see few reasons for Diamond to celebrate profusely, particularly on the business development front. The long-awaited inflection point in the offshore drilling space, at least in my opinion and in what pertains to observable financial impact, seems to be still out of sight.

Source: Oil Guru

Diamond Offshore by the numbers

Revenues of $366.0 million built up on last quarter's momentum, when Diamond delivered the first YOY top-line improvement since the start of the downcycle. But the nearly 5% growth over 2016 levels arrived just about in line with expectations. Adjusted EPS of $0.25 was five cents above consensus, as contained opex and a better effective tax rate helped to offset some loss of drilling efficiency.

Cost and cash management, in fact, were the main highlights of the quarter, in my view. G&A ticked up sequentially, but non-cash expenses associated with depreciation (as Diamond's rig fleet continues to shrink and adapt to market realities) helped to soften the blow of declines above the gross profit line.

Drilling costs came in richer sequentially, pressuring drilling margins that reached only 45.9% this quarter vs. 50.9% in 2Q17. The deterioration is unfortunate, given Diamond's progress at driving efficiency gains into margins last quarter. But with higher-margin projects being replaced by new contracts that are likely to be barely above cash breakeven, I would be too optimistic to expect profitability to improve considerably and sustainably in the immediate future.

See summarized P&L below, for both 3Q17 and the previous quarter.Source: DM Martins Research, using data from company reports

Looking at Diamond's recently released

This article was written by

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Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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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.

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