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Diamond Offshore Drilling Inc.

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Presentation on theme: "Diamond Offshore Drilling Inc."— Presentation transcript:

1 Diamond Offshore Drilling Inc.
Raj Dhawle Pratik Kamdar Jinglin Pan

2 Agenda Company Overview Macro-Economic Industry Overview Competitors
Porter’s Five Forces Competitors Company Performance SWOT Analysis Valuation Recommendation

3 Holdings History February 2008
Purchased 100 $ for a total cost of $12,290 Give portfolio exposure to oil and drilling sector November 2008 Purchased 50 $72.96 for a total cost of $3,648 September 2009 Written call option exercised, sold 100 shares at adjusted price of $76.25 totaling $7,625 Strike price adjusted to $76.25 from original strike price of $80.00 due to a special cash dividend of $1.875 paid twice over the holding period of the option Realized loss of $4,665 November 2010 Purchased 100 $68.10 As of 02/28/2011 Diamond offshore $78.23 Currently have 150 shares with unrealized gain of 12.20% Currently represents 3.45 % of the portfolio by holding value

4 Company Overview Among the largest deepwater drilling contractors
Provides drilling services to large Oil and Gas companies Operates one of the largest fleets of deepwater drilling rigs Key Facts: Headquartered in Huston, TX Currently employs 5300 people Stoke trades under ticker symbol ‘DO’ Current Price: $78.23 Market Capitalization (as on 02/28/2011) : B Area of Presence: USA, Australia, South America, Middle East, Asia, Africa Source:

5 Nature of Operation The contract for drilling is given to the drilling company for drilling a new well at designated area . The crude oil and natural gas are transported to the refineries of Oil and Gas Companies for refinement After refinement it is distributed downstream through different distribution chains

6 Key Revenue Drivers: Day Rates:
The rate that driller charges an operator for each day over contract period for the use of rigs Utilization Rate: The actual percentage of time in a year a rig would be utilized Both variables mentioned above depend on exploration expenditures set by oil and gas companies which in turn depend on Political, Regulatory and Economic factors Availability of rigs in an area of potential exploration also affects day rates and utilization rates

7 Peer Group Stock Movements
DO current stock price: $78.28 Source: Google Finance

8 Energy Outlooks Short Term Outlook Average $93 per barrel in 2011
World real GDP grows at 3.9% and 4.0% respectively Spot Prices (Crude Oil in Dollars per Barrel, Products in Dollars per Gallon) 2/15/2011 2/16/2011 2/17/2011 2/18/2011 2/22/2011 2/23/2011 83.13 83.8 85.05 85.03 92.65 96.04 Source: EIA

9 Energy Outlook Long Term Outlook
Total energy demand in non-OECD countries increases by 84% vs 14% in OECD countries between 2007 and 2035 Core growth in non-OECD: Brazil, China, Middle East Industrials sectors such as: manufacturing, mining, construction, agriculture Source: International Energy Outlook 2010, Highlights

10 Source: http://www. mcclatchydc

11 The End of ‘Easy Oil’ Exploratory efforts across the globe
Detected hydrocarbons off the shores of Sarawak, Western Australia, Vietnam, Bahamas, Congo etc Future giant oil fields projected to be in Middle East Iraq (relatively undeveloped fields) contracts with Exxon, Shell, BP, China National Petroleum to develop its oil fields.

12 Source: Financial News for Major Energy Producers, Third Quarter 2010, Page 5

13 Industry Outlook Oil and gas exploration industry grew at a healthy rate from The global economic crisis has led to rapid fall of prices in 2009. Sector production volumes increased with a compound annual growth rate (CAGR) of 1.2% between 2005 and 2009 and hence reach a total of 49.8 billion barrels in 2009. Source: Marketline Database

14 Future Growth Source: Marketline Database

15 Sector Value Forecast Source: Marketline Database

16 Porters Five force Model
Threat of New Entrants (Low): The oil drilling industry is highly capital extensive. The cost of equipment is high and the skilled labor is also very expensive. Due to high capital and very specific technical knowhow that is required in this industry. It makes the threat of new entrants very low. Power of Suppliers (Medium): The rig builders have more bargaining power is directly dependant on the demand for oil. If the demand for oil and hence the rigs is high, it makes the power of suppliers high. If the demand is low than it gives the drillers a better bargaining power. Power of Buyers (High): Buyers set out tenders and the bidder who bids with the lowest wins. The oil industry is going to grow in the future. However, there is going to be an oversupply of rigs as the number of rigs is likely to increase to 811. Around 45% of them are still without contract. This gives the buyers high bargaining power and may drag the day rates down. Threat of Substitutes (Low): There are many alternatives to oil and natural gas including coal, solar, and wind power. Coal is already well established in the market place while other alternative technologies are still far too inefficient to compete over the next decade. Industry Rivalry (High): There are high exit barriers due to the costs of the rigs and the lack of alternative uses for them. Therefore, companies want to stay in the industry, increasing rivalry. Bids to get contracts is very competitive and lowest cost wins the bid.

17 Competitors Analysis Types of Rigs Diamond Offshore Transocean Noble Corp Ensco High Specification Rigs 14 47 4 8 Intermediate Specification Rigs or midwater floaters 19 26 15 Jack ups 13 65 50 41 Total 46 138 69 49 Source:

18 Competitors Analysis Revenue by Region 42.80% 19.70% 17.70% 19.80%
 Company North America South America Europe/Africa/Mediterranean Middle East/Asia/ Australia Other Countries Diamond Offshore 42.80% 19.70% 17.70% 19.80% Transocean 19.40% 13.50% 9.40% 57.70% Ensco 19.50% 10.40% 50.30% Noble Corp 46.40% 10.20% 19.20% 22.60% Source:

19 Average Daily Rates 356 249 102 (All rates in $000’) Diamond Offshore
Transocean Noble Corp Ensco 2010 2009 High Specification Rigs 356 390 466 410 256 254 375 425 Intermediate Specification Rigs or midwater floaters 249 280 318 335 288 368 Jack ups 102 128 92 162 96.9 147 109 120

20 Average Utilization Rates
Diamond Offshore Transocean Noble Corp Ensco 2010 2009 High Specification Rigs 73% 81% 71% 86% 89% 91% 85% Intermediate Specification Rigs or midwater floaters 68% 69% 100% Jack ups 61% 72% 41% 55% 79% 82% 77% 75%

21 Transocean Forecasted Daily Rates
Average Day rates 2010 2011 2012 2013 2014  2015 High Specification Rigs 448 479 482 480 441 465 Intermediate specification Rigs 344 366 338 261 265 337 High Specification Jack ups 166 162 185 180 168 Standard Jack Up 141 128 109 84 78 130

22 Key Ratios Ratios Diamond Offshore Transocean Noble Corporation Ensco Debt/Equity 0.41 0.48 0.11 0.05 Operating Margin 52.41 38.08 55.23 48.85 ROE 39.44 17.16 27.79 15.32 ROA 24.57 8.88 21.66 12.39 Capex as % of sales 11.36 26.41 21.37 44.26 Source:

23 Stock Performance Stock appreciated almost 43% after bottoming out in June 2010
Source:

24 History In the Oil Crisis of 1980, Jim Tisch of Loews Corp bought out all drilling assets of Diamond M Drilling Co. owned by Kaneb Services Inc. at substantially distressed prices In 1992, Diamond M Drilling Co. under the ownership of Loews purchased all outstanding stock of Ocean Drilling and Exploration Co. , through which it acquired 39 rigs which still remain with DO’s fleet today In 1993, Loews renamed Diamond M Drilling Co. as Diamond Offshore Drilling Inc. Loews Corp took the company public in 1995 by selling 30% stake in an IPO Jim Tisch of Loews Corp still holds 51 % stake in the company

25 Nature of Operations Oil and Gas companies carry out geological surveys and based on that give a drilling contract to a driller on designated area. Drilling company performs following operations: Exploratory Drilling: Drill a new well for exploration Development Drilling: Dig new wells in areas of successful exploration and complete wells for continued hydrocarbon extraction by operators

26 The Fleet Different types of rigs/equipments:
High Specification Floaters(Submersibles & Drillships): Capable of working in water depths of 4000 feet or greater and harsh environment Intermediate Submersibles: Capable of working in maximum water depths of 4000 feet Jack-ups: Capable of working in water depths of 20 feet to 350 feet

27 Rig Locations and Revenue Drivers
GOM Mexico Australia/Asia/Middle East Europe/Africa/Mediterranean South America High Specification Floaters 2* 3 2 7 Intermediate Submersibles 3** 4*** 9 Jack-ups 6**** 1 *1 out of 2 contracted floaters received a notice for the termination of contract by an operator **2 out of 3 intermediate semis in GOM are cold staked ***1 intermediate semi is cold staked in Malaysia ****4 out of 6 Jack-ups in GOM are cold staked Type of Rig No's Avg Utilization Rate Avg Day Rate Avg % of Total Revenue High Specification Floaters 14 72% 356,000 40% Intermediate Submersibles 19 82% 249,200 48% Jack-ups 13 112,000 12%

28 Breakdown of Revenues By Geographic Region Region 2010 2009 2008
United States/GOM 19% 34% 41% South America 39% 20% 16% Australia/Asia/Middle East Europe/Africa/Mediterranean 18% Mexico 4% 9% Revenue in GOM has decreased due to moratorium on drilling activity in GOM after Macondo Incident Diversification strategy is paying off as revenues from international regions have been increasing By Rig Category Type of Rig 2010 2009 2008 High Specification Floaters 44% 39% 38% Intermediate Submersibles 48% 47% Jack-ups 8% 13% 15% Total Revenues 3,229,517 3,536,579 3,476,417 Approx 85 % Revenues come from high specification floaters and intermediate submersibles

29 SWOT Analysis Strengths Weaknesses Strong Fleet
Strong International Presence Strong Contact Revenue Backlog Increase in Long Term Debt Concentrated Customer Base Significant no. of old rigs compared to competitors Increase in insurance cost Opportunities Threats Positive Outlook for Oil and Gas Sector Increase in Demand for Natural Gas and Liquid Fuels in US Tough Competition Increasing Environmental Regulations Operational Risk

30 ROE Breakdown

31 Base Case Revenue Base-Case Scenario: Utilization Rates at Historical Rates Revenues (in millions): Utilization Rates No's After 2013 2011 2012 2013 2014 2015 2016 2017 High Specification Semis 13 15 83% 81% 79% 74% 70% Intermediate Semis 19 66% 82% 77% 75% 72% Jack Ups 14 24% 73% Average Day Rates: 435,000 440,000 455,000 469,000 437,000 320,000 322,000 342,000 347,000 349,000 344,000 110,000 112,000 117,000 121,000 124,000 131,000 137,000

32 ($ in millions, except per share amounts)
Discounted Cash Flow ($ in millions, except per share amounts) FORECASTED Year Ending December 31 2011 2012 2013 2014 2015 2016 2017 Terminal Value Net Income $1,224.5 $1,478.7 $1,555.7 $1,688.2 $1,578.5 $1,558.1 $1,614.6 Add: D & A 349.6 347.1 344.9 439.2 436.0 433.1 430.4 Less: Changes in Net Working Capital (NWC) (46.6) (176.7) (99.8) (92.3) 56.2 (7.4) 4.6 + Change in A/R 138.9 99.2 53.4 54.4 (32.7) 5.8 (4.7) + Change in Other Current Assets (32.2) (2.0) 4.0 (5.0) (1.0) 0.0 - A/P and Accrued Taxes and Liabilities 544.4 79.5 42.4 42.9 (27.5) 2.6 0.2 - Other Current Liabilities (604.6) Less: Capex (620.0) (350.0) (1,200.0) (450.0) FCF 907.4 1,299.2 600.8 1,585.0 1,620.6 1,533.7 1,599.5 $18,559.6 PV FCF $907.4 $1,031.1 $378.5 $792.4 $643.0 $482.9 $399.7 $9,194.1 Discount Rate 22.6% Discount Rate (Terminal Adjusted) 12.4% Terminal Growth Rate 4.0%

33 Valuation Present Value of FCF's 11,780.3 Less: Outstanding Debt
Less: Outstanding Debt 1,495.6 Plus: Cash and ST investments 404.4 Outstanding Shares 139.0 Million Value per Share $76.89 Discount Rate $76.89 19% 20% 21% 22% 22.6% 23% 24% 25% Terminal Growth Rate 2.50% $ $ $ $ $ $ $ $ 3.00% $ $ $ $ $ $ $ $ 3.50% $ $ $ $ $ $ $ $ 4.00% $ $ $ $ $ $ $ $ 4.50% $ $ $ $ $ $ $ $ 5.00% $ $ $ $ $ $ $ $ 5.50% $ $ $ $ $ $ $ $

34 Other Scenarios Positive: Anticipation of utilization rates in the 80s% with slightly higher day rates On average, revenues are higher by 9% Fair Value Estimate: $91.90 Negative: Oversupply leads to lower utilization rates and lower day rates. On average, revenues are lower by 10% Fair Value Estimate: $61.66

35 Multiples Valuation Forward P/E 33% 66.85 Price/Sales 86.87 TEV/EBITDA
100.61 Estimated Value $84.78

36 Recommendation To place a limit sell (for 50 shares purchased in Nov $72.96) Long Term Capital Gain of: $352 (4.82%)


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