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Diamond Offshore Drilling Inc. Raj Dhawle Pratik Kamdar Jinglin Pan

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Presentation on theme: "Diamond Offshore Drilling Inc. Raj Dhawle Pratik Kamdar Jinglin Pan"— Presentation transcript:

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

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

3 Holdings History February 2008 Purchased 100 shares @ $122.90 for a total cost of $12,290 Give portfolio exposure to oil and drilling sector November 2008 Purchased 50 shares @ $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 shares @ $68.10 As of 02/28/2011 Diamond offshore closed @ $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) : 10.88 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 Source: Google Finance DO current stock price: $78.28

8 Energy Outlooks Short Term Outlook Average $93 per barrel in 2011 Average $98 per barrel in 2012 World real GDP grows at 3.9% and 4.0% respectively Spot Prices (Crude Oil in Dollars per Barrel, Products in Dollars per Gallon) 2/15/20112/16/20112/17/20112/18/20112/22/20112/23/2011 83.1383.885.0585.0392.6596.04 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:

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 2005-2007. 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 hall&Nty=1&D=oil+and+gas+exploration&Ntk=All&Ns =

14 Future Growth Source: Marketline Database =oil+and+gas+exploration&Ntk=All&Ns =

15 Sector Value Forecast Source: Marketline Database 1&D=oil+and+gas+exploration&Ntk=All&Ns =

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 Source:

18 Competitors Analysis Source: matchall&Nty=1&D=diamond+offshore&Ntk=All&Ns=

19 Average Daily Rates &Nty=1&D=diamond+offshore&Ntk=All&Ns=

20 Average Utilization Rates secToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDA5NTAxMjMtMTEtMDE4NjA3L3RvYy9wYWdl &ListAll=1&sXBRL=1

21 Transocean Forecasted Daily Rates Transocean ($000) Average Day rates20102011201220132014 2015 High Specification Rigs448479482480441465 Intermediate specification Rigs344366338261265337 High Specification Jack ups166162185 180168 Standard Jack Up1411281098478130 secToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDA5NTAxMjMtMTEtMDE4NjA3L3RvYy9wYWdl&ListAll=1&sXB RL=1

22 Key Ratios Ratios Diamond Offshore Transocean Noble Corporation Ensco Debt/Equity 0.410.480.110.05 Operating Margin 52.4138.0855.2348.85 ROE 39.4417.1627.7915.32 ROA 24.578.8821.6612.39 Capex as % of sales 11.3626.4121.3744.26 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 DOs 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 LocationsGOMMexico Australia/As ia/Middle East Europe/Afric a/Mediterra nean South America High Specification Floaters2*0327 Intermediate Submersibles3** 4***39 Jack-ups6****2311 Rig Locations and Revenue Drivers *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 RigNo's Avg Utilization Rate Avg Day Rate Avg % of Total Revenue High Specification Floaters1472%356,00040% Intermediate Submersibles1982%249,20048% Jack-ups1372%112,00012%

28 Breakdown of Revenues By Geographic Region Region201020092008 United States/GOM19%34%41% South America39%20%16% Australia/Asia/Middle East19%20%16% Europe/Africa/Mediterranean18% Mexico4%9% By Rig Category Type of Rig201020092008 High Specification Floaters44%39%38% Intermediate Submersibles48% 47% Jack-ups8%13%15% Total Revenues3,229,5173,536,5793,476,417 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 Approx 85 % Revenues come from high specification floaters and intermediate submersibles

29 SWOT Analysis StrengthsWeaknesses 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 OpportunitiesThreats 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

32 Discount Rate22.6% Discount Rate (Terminal Adjusted)12.4% Terminal Growth Rate4.0%

33 Valuation Present Value of FCF's11,780.3 Less: Outstanding Debt1,495.6 Plus: Cash and ST investments404.4 Outstanding Shares139.0Million Value per Share $76.89

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/E33% 66.85 Price/Sales33% 86.87 TEV/EBITDA33% 100.61 Estimated Value $84.78

36 Recommendation To place a limit sell order@$80.00. (for 50 shares purchased in Nov 2008 @ $72.96) Long Term Capital Gain of: $352 (4.82%)

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