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Is More Rig Scrapping in Store for Diamond Offshore?

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May. 9 2016, Updated 8:08 a.m. ET

Capital-intensive industry

Offshore Drilling (XLE) (IYE) is a capital-intensive industry that requires a large amount of money to keep drilling rigs active. In 2015, all of the players in the industry including ENSCO (ESV), Seadrill (SDRL), Transocean (RIG), Atwood Oceanics (ATW), and Noble (NE) have been reacting to the depressed rig demands by either scrapping rigs or cold stacking them.

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Diamond Offshore’s stacking and scrapping

Diamond Offshore Drilling cold stacked one rig in 1Q16. This brings the company’s total cold stacked rigs to 15%–50% of the total fleet. One more rig is expected to be stacked in the second quarter.

In 1Q16, the company sold three rigs at scrap value. Due to scrapping and cold stacking, the company was able to achieve significant cost reductions. We should keep in mind that as an offshore drilling company’s active fleet decreases, its revenue potential also suffers.

Will there be more scrapping?

In an oversupplied rig market, older vessels are the last choice among customers. So, it’s difficult for a company to obtain contracts for older vessels. They’re less productive and become redundant over time. Out of the 15 rigs that are cold stacked by Diamond Offshore, eight rigs are over 30 years old.

Diamond Offshore’s management doesn’t explicitly state its plans on scrapping. For our part, we can assume that the company will retire some or all of these rigs in the coming quarters in order to manage its costs and weather the downturn.

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