uploads///Historical Valuation

Explaining Diamond Offshore Drilling’s Historical Valuation

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Nov. 20 2020, Updated 3:55 p.m. ET

Diamond Offshore Drilling’s PE trend

Diamond Offshore Drilling’s (DO) price-to-earnings (or PE) multiple rose marginally from fiscal 2009 to fiscal 2014. Until fiscal 2014, DO’s adjusted earnings had fallen 72% since fiscal 2009. On an average, its share price fell 63% during this period. A steeper earnings fall relative to share price decline caused a PE multiple expansion over the past six years.

In the first three quarters of fiscal 2015, DO’s adjusted earnings rose as day rates and average rig utilization improved in some of DO’s offshore rig types. DO’s year-to-date share price fell, causing its PE multiple to fall.

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Forward PE considers the sell-side analysts’ consensus estimate of earnings for the next four quarters. DO’s forward PE of 21.2x is higher than its current PE multiple, indicating an expected sharp drop in earnings over the next four quarters. This explains its low current PE multiple compared to its six-year average.

Price to cash flow multiple

Starting in fiscal 2009, DO’s price-to-cash flow (PCF) multiple fell until fiscal 2011, rose in the next two years, and then fell again in fiscal 2014. In fiscal 2014, DO’s PCF fell over fiscal 2013 because its cash flow from operations fell while its share price fell even more sharply.

Going forward, analysts expect PCF to rise, which reflects analysts’ expectations of lower cash flow in the next four quarters.

Diamond Offshore Drilling’s EV/EBITDA trend

DO’s historical valuation, expressed as an enterprise value to earnings before interest, tax, depreciation, and amortization (EV/EBITDA) multiple, was range bound from fiscal 2009 to fiscal 2014. In fiscal 2014, DO’s net debt rose sharply over fiscal 2013 as the result of a sharp fall in cash and marketable securities.

DO’s share price fell even more in fiscal 2014, causing EV to fall. Although DO’s EBITDA fell, it could not fully offset the fall in EV, leading to an EV/EBITDA fall in fiscal 2014 over fiscal 2013.

In the first three quarters of fiscal 2015, DO’s net debt continued to rise while its share price fell sharply. In effect, DO’s EV fell. Its trailing-12-month EBITDA also fell, partly offsetting its EV’s fall. This led its EV/EBITDA ratio to fall until now.

RPC’s (RES) trailing-12-month EV/EVITDA ratio currently stands at 6.5x, higher than DO’s 4.8x. DO is 1.7% of the VanEck Vectors Oil Services ETF (OIH), an ETF that tracks an index of 25 oilfield services companies.

Forward EV/EBITDA considers the sell-side analysts’ consensus estimate of EBITDA for the fiscal year. DO’s forward EV/EBITDA multiple for fiscal 4Q15 is higher than its current EV/EBITDA multiple. This implies that analysts expect a fall in DO’s EBITDA in fiscal 4Q15.

DO’s low current EV/EBITDA multiple compared to its six-year average reflects an expected fall in operating earnings.

Next, we’ll discuss DO’s valuation compared to those of its industry peers.

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