Diamond Offshore Announces Major Contracts For Drillships

Apr. 29, 2019 2:09 PM ETDiamond Offshore Drilling, Inc. (DO)41 Comments25 Likes
Vladimir Zernov profile picture
Vladimir Zernov
16.15K Followers

Summary

  • Diamond Offshore presents new fleet status report.
  • Two drillships get major contracts and will now work until 2023.
  • Given dayrate estimates, the move may be viewed as defensive by the market.
  • Fundamentally, it's just another good step in an almost flawless execution during the current market downturn.
  • Should the market be too harsh to Diamond Offshore's shares, picking them in the $9.00-10.00 range for a speculative trade makes perfect sense.

Ocean BlackHawk

Diamond Offshore (NYSE:DO) has just published its fleet status report which contains major news. Without further ado, let's look at the changes:

  1. Drillship Ocean BlackHawk has received a new contract from Woodside in Senegal. The rig will work from Q1 2022 (!) to Q1 2023. The contract has options. Bassoe Offshore estimates that the contract dayrate is $275,000. Currently, the rig is contracted until April 2021, so the new contract ensures that the rig will be busy (with a gap in 2021) up until 2023.
  2. Drillship Ocean BlackRhino will work for Woodside in Senegal from Q4 2020 to Q4 2023. This contract also has options. As in the case of Ocean BlackHawk, the dayrate is undisclosed, but Bassoe Offshore estimates that the dayrate is $275,000. I'd love to hear management's comments on these contracts during the earnings call, which we'll later discuss in an article on Diamond Offshore's Q1 2019 financial results.
  3. Semi-sub Ocean GreatWhite got a job with an undisclosed operator in the UK. The rig will work from late July 2019 to mid-October 2019. Bassoe Offshore estimates that the dayrate is $190,000. This contract comes in direct continuation of the previous job with Siccar Point, so the rig won't have any contract gaps until Q4 2019.
  4. Semi-sub Ocean Apex got a contract with BP (BP) in Australia. The rig will work from early October 2020 to late December 2020, in direct continuation of the previous work with Woodside which ends in late September 2020. Thus, Ocean Apex is fully booked from May 2019 to December 2020.
  5. Drillship Ocean BlackHornet will work for BP in the U.S. Gulf of Mexico in comparison with the previous indication of "Global". This is interesting news for those of us who also follow the story of the U.S. Gulf of Mexico offshore support vessel provider Hornbeck Offshore (HOS).
  6. Drillship Ocean BlackLion will also drill for BP in the U.S. Gulf of Mexico in comparison with the previous indication of "Global".

This was a very interesting fleet status report. Once again, Diamond Offshore has shown its ability to find contracts for its rigs. The new contracts for drillships put the company in a very interesting situation. All four drillships are now booked until 2022-2023. I have previously estimated that BP contracts for BlackHawk and BlackLion came with a dayrate of about $250,000. Should Bassoe estimate of a $275,000 dayrate for new Woodside contracts prove right, the company will have all drillships locked below $300,000 per day until 2022-2023.

These dayrates are good compared to the current spot rates of about $175,000 but below the optimistic projections. In this sense, the obviously great fleet status report may even serve as a short-term bearish catalyst for the industry as some investors and traders still believe that a speedy recovery envisioned by Transocean (RIG) will happen. Since Diamond Offshore was the most accurate company in predicting the length and severity of the market downturn, the market can take these new contracts as a call on "no rates above $300,000 until 2023".

Regardless of how the market will take the news in the short-term, I believe that the new contracts are fundamentally good for the company. Diamond Offshore has secured cash flow positive contracts for all its drillships for a period that is lengthy enough for spot rates to recover and ensure the viability of the company. I believe that the new contracts fully reflect the view that Diamond Offshore has reiterated many times - modern drillships are the most overcrowded segment of the market so fixing them for the next several years while leaving some optionality on the semi-sub side makes perfect sense.

Diamond Offshore remains one of my favorite drillers: solid balance sheet, rigs that have proven their attractiveness to the market, and great execution from the management team will ensure that the company will ultimately thrive in due time. Meanwhile, should the market be too harsh to Diamond Offshore's shares in the near term, I'd look for a speculative entry somewhere between the support levels at $9.00-10.00.

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This article was written by

Vladimir Zernov profile picture
16.15K Followers
I'm a trader who trades both short-term and long-term. I started my career as a day-trader for a trading firm, but then turned to longer time frames and went on my own to manage my portfolio. I use technical analysis as well as fundamental analysis in my research.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DO over 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.

Additional disclosure: I may trade any of the above-mentioned stocks.

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