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Deep Down, Diamond Offshore Is Oh-So Strong

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Houston-based deepwater drilling contractor Diamond Offshore (NYSE: DO  ) has demonstrated the appropriateness of the notion that investing, done wisely, involves looking ahead, rather than focusing on our rearview mirrors. In adopting the former approach, it becomes clear that the company enjoys strong demand for its services -- along with strong dayrates -- in virtually all of the world's most significant offshore oil and gas venues.

For its most recent quarter, Diamond reported net income of $178 million, or $1.28 per share, compared with $257 million in earnings -- $1.85 per share -- for the comparable quarter of 2011. Looking at a perhaps more important sequential comparison, in the second quarter of this year, Diamond earned $201 million, or $1.45 per share. However, the second-quarter results included a gain of approximately $50 million, or $0.36 per share after tax, on the sale of five jack-up rigs. On that basis, Diamond Offshore's sequential change represented an improvement, and handily topped the $1.02 per share consensus expectation for the company.

A major yield booster
Before moving beyond the financial aspects of the company, it's important to note that the board of Diamond Offshore, which operates as a subsidiary of Loews Corporation (NYSE: L  ) has again declared a special quarterly dividend of $0.75 per share. That dividend, along with a $0.125 regular quarterly dividend, will be paid on Dec. 3, 2012, and to shareholders of record on Nov. 1, 2012. Significantly, and as I noted to fools recently, the board's recent record of distributing special dividends has ratcheted the company's trailing dividend yield to a healthy 4.90%.

Diamond's release of its quarterly results followed by one day the third-quarter-earnings report of $0.45 a share by its competitor, Noble Corporation (NYSE: NE  ) . Noble's per-share results were down from $0.53 per share a year earlier and below the analysts' $0.50 per share consensus forecast.

As Diamond Offshore's CEO Lawrence Dickson noted on the post-release call, his company's sequential earnings improvement was largely attributable to an ongoing focus on cost control: "... [We're] very pleased with our operating expenses. We've continued quarter-after-quarter to just stay very tight within our budget, and this is in spite of the fact that conditions do change on us, and there are a lot of cost inflation pressures."

World traveler
Should you take a gander at Diamond's rig status report on its website, you'll notice that the company's units are active in a host of worldwide locations, including the U.S. Gulf of Mexico, Indonesia, the Philippines, and Equatorial Guinea. It also has several units working for Petrobras (NYSE: PBR  ) in Brazil, and is garnering a steady stream of new deals. Beyond that, the company has six units under construction, four of which will be capable of drilling in waters up to 12,000 feet deep.

Continuing our geographic approach, as Michael Acuff, the company's senior vice president for contracts and marketing, noted on the call, strengthening demand pervades many of the world's offshore sites. As he said, for instance: "In the U.S. Gulf of Mexico, we have seen a resurgence in activity in the deepwater and ultra-deepwater arenas over the past year and are now approaching pre-Macondo activity levels with expectations of continued demand taking this up to possibly 40 rigs in 2013."

Looking at somewhat shallower areas, Acuff said that "in the mid-water segment of our business, as we stated on our last call, the market continues to operate in two distinct segments, the very strong North Sea region and the other international and U.S. Gulf of Mexico markets that remain steady."

As to the all-important subject of dayrates, Acuff noted that in ultra-deepwater locations, three-year contracts are commanding a healthy $600,000 per day, except in West Africa, where the figures are $20,000-$30,000 higher. In the deepwater, contracts of less than a year are currently above $500,000, while longer-term contracts generally are in the high $400,000 range.

Foolish bottom line
Given Diamond Offshore's solid performance, I'll be patiently awaiting the release of results by the biggest of the offshore contractors, Transocean (NYSE: RIG  ) , on Oct. 29. In the meantime, given the worldwide movement into deeper waters and long-term contracts, I'm a believer that the offshore drillers, especially those with the ability to drill in a couple of miles of water, should be included in Foolish energy portfolios.

If you're interested in Diamond Offshore, I suggest that you add the company to My Watchlist.

If you're an energy investor looking for new opportunities, then you should look into one of the more exciting plays in the space: Seadrill. To learn more about the strengths and weaknesses of the company, as well as what to expect from Seadrill going forward, be sure to check out this brand-new premium report one of our top Stock Advisor analysts has put together. Click here to get started.

David Lee Smith owns shares of Transocean. The Motley Fool owns shares of Transocean. Motley Fool newsletter services recommend Petroleo Brasileiro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Related Tickers

10/21/2016 4:01 PM
DO $17.40 Down -0.50 -2.79%
Diamond Offshore D… CAPS Rating: **
L $40.80 Down -0.61 -1.47%
Loews CAPS Rating: ***
NE $5.97 Down -0.04 -0.67%
Noble CAPS Rating: ****
PBR $12.17 Up +0.16 +1.33%
Petroleo Brasileir… CAPS Rating: **
RIG $10.50 Down -0.09 -0.85%
Transocean CAPS Rating: ****