Diamond Offshore Drilling Inc. Han Yang Xuhao Yang Ryo Seob Kim Jionghan Dai Tyler Haida October 27, 2011 Analysts:
Agenda Industry Analysis Competitors Company Overview Company Performance Valuation Recommendation
Holdings History February 2008 Purchased 100 $ November 2008 Purchased April 2009 Sold a Sep. $80 Bought a Sep. $60 September 2009 Sold 100 $76.25 vs. exercise adjusted strike on short call October 2010 Purchased 100 $68.02 March 2011 Recommendation to sell 50 $80 limit NOT APPROVED
Holdings Continued On Wednesday October 26, 2011 DO $65.15 Currently hold 150 shares Currently DO holdings are 2.86% of total portfolio holdings.
Industry Demand is driven by oil and gas prices Offshore drilling requires specialized equipment such as drill ships, semi-submersible rigs, “jack-up” rigs Deepwater drilling is expect increase in the next few years Large oil and gas field services companies typically do their business internationally
Competitor Transocean (RIG) - Largest offshore drilling firm ($18 B market cap) Noble Corporation (NE) - Swiss offshore firm ($9 B market cap) Ensco PLC (ESV) - Founded in 1975 in British ($11.9 B market cap)
Fleet Comparison Company High-Specification Floaters Intermediate Semisubmersibles Jack-upsTotal DO RIG NE EVS Competitor Source: DO, RIG, NE, EVS 2010 annual report
Revenue distribution comparison DoRIGESVNE Total Revenue % % %2,807100% South America130839% 0% 52719% Australia/Asia/Middle East64119% 0%50230%63623% United States63519%211722%37822%58521% Europe/Africa60118%118312%34120%50318% Mexico1364% 0% 55320% Other contries %47528% Competitor Source: bloomberg
Performance comparison P/E1-yr return Earning margin (12 months)ROEDebt/Equity DO %29.70%25.40%35.00% RIG %0.40%-0.40%53.00% NE %13.20%4.50%47.80% ESV %24.40%5.30%47.80% Competitor Source: yahoo finance
Company Overview Diamond Offshore Drilling, Inc.is a leading deepwater drilling contractor, owns and operates one of the largest fleets of offshore drilling units in the world. The company's diverse fleet consists of 32 semisubmersibles, 13 jack-ups and four dynamically positioned drillships, three of which are on order with delivery expected in 2013 and 2014 We provide offshore drilling services to a customer base that includes major independent oil and gas companies and government-owned oil companies. source :
Global Presence
Source: DO 2010 Annual Report
The Fleet Jack-up Semisubmersible Drillship Drilling ship Source:
Jack-up Jack-ups rigs are mobile, self- elevating drilling platforms equipped with legs that are lowered to the ocean floor until a foundation is established to support the drilling platform. Used for drilling in water depths from 20 feet to 350 feet. Currently have 13 jack-up drilling rigs Source:
Semisubmersible Semisubmersible operate in a “semi- submerged”position, remaining afloat, off bottom, typically anchored in position and remain stable for drilling in the semi-submerged floating position High-specification semisubmersibles are generally capable of working in water depths of 4,000 feet or greater or in harsh environments Intermediate semisubmersibles generally work in maximum water depths up to 4,000 feet Currently have 32 semisubmersibles Source:
Drillship Typically self-propelled, positioned over a drill site through the use of either an anchoring system or a dynamic-positioning system similar to those used on certain semisubmersible rigs. Capable of working in water depths as deep as 12,000 feet Currently have one high-specification drillship, the Ocean Clipper. Three drillships under construction, BlackHawk and BlackHornet will be delivered in 2013 while BlackRhino in 2014.The former two have already signed contracts with Anadarko with day rates of 495K/day and total backlog of 1.8 billion Source:
Business model and Revenue drivers Day rate Contracts Our contracts to provide offshore drilling services vary in terms and provisions. We typically obtain our contracts through competitive bidding Guaranteed a fixed day rate basis regardless of whether or not such drilling results in a productive well Revenue Drivers Day rate : the rate that DO charges an operator for each day over contract period for the utilization of rigs Utilization rate: the actual percentage of time in a year a rig is utilized Source: DO 2010 Annual Report
Trends of Revenue Drivers Source: DO 10Q from 2004 to 2011
Aging Problem of Fleet DO’s fleet is actually the oldest in offshore drilling industry with an average age of 32 years. Source:
Negative result of fleet aging The upgrade of fleet would cost several billions, it would prevent the fleet from becoming outdated and help create long-term value. Rather than hoard cash for potential rig-buying opportunities at the bottom of the cycle, Diamond has been paying out its excess capital to shareholders in the form of special dividends, which is 0.75 dollars per quarter The substantial increase in activity is placing tremendous stress on the industry's aging rig fleet. Diamond has been slower than its peers in upgrading its fleet and ordering new rigs to handle rich ultra-deep-water contracts. Diamond will have higher maintenance expenditures than peers' in the next few years. Once current contracts expire, Diamond's old rigs will be competing with peers' upgraded and ultra deep-water rigs for lucrative contracts. We think customers will pay more to retain peers' rigs for challenging jobs, which will leave Diamond with lower fleet-utilization and day rates. Ultimately, Diamond's profitability would be severely damaged.
ROE Analysis (%) EBIT Margin Asset Turnover Leverage Ratio Interest Ratio Tax Burden ROE
Multiple – P/E Source: Capital IQ
Multiple – P/E Correlation between price and earnings Investors responded to BP oil spill Price was driven by the market in the pass year Source: Capital IQ Source: Yahoo Finance P/E in last 3 years Highest11.85 Lowest5.76 Average8.9 10/24/
Multiple – P/E Source: Capital IQ DORIGESVNE 5-year Avg DO is among the top before the oil spill incident Recent soar in P/E is not “healthy” Stock price went down Earning decreased even more Use 5-year average
Multiple – P/E In the coming years Market shows optimism on Euro debt issue Industry average P/E is for the past 5 year DO reported increase in third quarter earning DO was among the top before the oil spill incident P/E may rise, but we do not expect P/E to jump over historical high Use P/E = 10 for projection Estimated Price is $90.60 P/E in last 3 years Highest11.85 Lowest5.76 Average8.9 10/24/
Multiple – P/S Source: Capital IQ Price v.s. Earning Price v.s. Sales
Multiple – P/S Net margin now is lower than it was from 2006 to 2009 P/S was 2.63 on Oct. 24, 2011 We do not expect a great raise in P/S Use P/S = 2.8 for projection Estimated Price is 67.12
Multiple – P/BV Source: Capital IQ
Recommendation Estimated Price DCF$74.54 P/E$90.60 P/S$67.12 Recommendation : Hold for now