Diamond Offshore Drilling’s (DO) management expects the energy downturn to continue for a long period. In order to counter such a cyclical downturn, DO is emphasizing cost-reduction, increasing its borrowing capacity, and acquiring new contracts.
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In a 3Q15 press release, DO’s chief executive officer (or CEO) Marc Edwards said, “We all know our industry is cyclical. But as we have been saying for a considerable period of time, this will be a long and a hard downturn, the likes of which we have not seen for decades.”
Edwards continued, “Over 12 months ago here at Diamond, we took the initial steps to prepare accordingly. We initiated a head count reduction. We increased our revolver. We were the first driller to retire assets in this cycle, and of course, we worked hard to successfully secure the Hess term contract for our last two drillships.”
Deliberating on DO’s contract termination and contract extensions, DO’s management also gave a brief summary in its fiscal 3Q15 press conference: “We announced this morning that we have reached agreement with Petrobras to end the contracts on the Ocean Alliance and the Ocean Clipper as of October the 30, while concurrently adding 875 days of new term to the Ocean Courage at a rate of $380,000 per day, extending the contract term into mid-2020. The existing three-year terms on the Ocean Courage and Ocean Valor will remain at a rate of $455,000 per day, and a new term added to the Ocean Courage represents a backlog addition of $333 million.”
Due to the unpredictability of energy price recovery, Wall Street analysts’ opinions show limited upside potential for DO’s target prices in the next 12 months. While the highest target price for DO is $27, the lowest is $14.
The median target price for DO, surveyed among sell-side analysts, is ~$19.3. DO is currently trading at ~$21, implying a ~9% downside at its median price. Noble Corporation (NE), DO’s similar market cap peer in the oilfield equipment and services industry, has a $13.3 median target price. This, relative to its current price of $11, implies a 22% upside. DO forms 0.2% of the Energy Select Sector SPDR ETF (XLE).
Next, we’ll discuss DO’s segment-by-segment revenue and earnings.