I doubt I'll ever understand the valuations accorded Diamond Offshore (NYSE: DO ) and its peers among the better offshore contract drillers.
On Thursday, the company announced first-quarter results for 2007, including $224.1 million in earnings. At $1.64 per share, that figure is nearly 55% more than the $145.3 million, or $1.06 per share, it earned a year ago. Yet the company trades at a forward 2007 P/E of 10.6, and sports a PEG ratio of only 0.35, indicating that its earnings are expected to grow far more quickly than its current P/E suggests.
Yes, I get it. The drillers -- Diamond, Transocean (NYSE: RIG ) , Atwood (NYSE: ATW ) , Ensco (NYSE: ESV ) , and GlobalSantaFe (NYSE: GSF ) , to name just a few -- are cyclical, and they deserve their decided discount to the market. Even I can't argue that all the cyclicality has been wrung out of the oil patch.
But I would contend that the sector is nowhere near as cyclical as in previous years, and far less cyclical than many other industries untarred by that dubious reputation. After all, why does steadily atrophying New York Times (NYSE: NYT ) trade at a forward multiple twice that of Diamond Offshore?
In releasing its results on Thursday, Diamond noted that it has received new contracts for three of its semisubmersible rigs. (Semisubmersibles are massive pieces of equipment, with ballast tanks that are filled with water and sunk beneath the sea's surface to provide stability during drilling.) Two of those call for five-year terms off the coast of Brazil. Each contract could potentially generate more than $400 million for the company. How is that cyclical, again?
I only hope that Fools will do their investment portfolios a favor, and carefully consider adding Diamond Offshore or its brethren.
For related Foolishness:
- Two Offshore Drillers to Pump Up Your Portfolio
- Deep Profits in Deep-Water Drilling
- An Energy Services Starter Kit
Fool contributor David Lee Smith owns shares in Diamond Offshore, but not in the other companies mentioned. He welcomes your comments or question. New York Times was, until recently, an Income Investor selection. The Fool has a disclosure policy.