The Horizon Still Looks Choppy for this Diamond in the Rough Waters

Diamond Offshore's management remains cautious about the company's outlook

May 2, 2014 at 9:15AM

When Diamond Offshore (NYSE:DO) released its consensus-beating first quarter earnings last week, investors across the offshore drilling sector breathed a sigh of relief.

There was much anticipation heading into the results as many Wall Street analysts have turned negative on the offshore drilling sector during recent months. Some analysts even commented that Diamond Offshore was in the midst of a 'flow blown meltdown '.

Still, Diamond's headline figures beat consensus estimates by almost 50% as the company reported a profit of $0.93 per share, compared to estimates of $0.65. The outperformance was mainly due to lower than expected costs.

Cutting costs, boosting profit
Diamond's operating expenditure fell across the board during the first quarter as contract drilling expenses declined to $370 million for the period, down from the $412 million expected by analysts and company guidance of $405 million to $425 million.

Declining operating costs within Diamond's deepwater drilling division were the main catalyst for the majority of operating cost declines. Deepwater drilling expenses came in at $72 million for the period vs a forecast of $90 million.

What's more, to appease investors, Diamond Offshore's management declared a $0.75 per share special dividend, and the company's quarterly filing showed that stock had been repurchased during the period, although these buybacks only boosted EPS by 0.4%.

However, many analysts consider Diamond Offshore's results to be an indicator of offshore drilling industry health as the company's drilling fleet has an average age of 25.7 years; a rig in service for more than 25 years is considered old. Analysts had expected Diamond to report poor results due to the state of the industry and the age of the company's fleet .

Indeed, older fleets are expected to suffer more from the upcoming industry slowdown, but, as of yet, Diamond is not reporting much change in demand for its services. For example, two of Diamond's 40-plus year old deepwater rigs are returning to work in the next two months, one of which is returning for a higher day rate than expected.

So, as Diamond's results beat consensus, there is a feeling that the industry slowdown might not be as severe as originally thought.

Unfortunately, while good for the most part, Diamond's earnings report did contain an element of caution. Specifically, Diamond's Chief Executive Marc Edwards warned on the conference call that:

"...[2014] could be a tough environment for offshore drillers..."

Not yet feeling the pain
Still, it would appear that the slowdown in the offshore oil and gas drilling market, which many analysts have been forecasting for some time now, is not yet starting to take hold. 

For example, in addition to Diamond Offshore's set of upbeat results just released, both Transocean (NYSE:RIG) and Rowan Companies (NYSE:RDC) have recently released their own fleet status reports, which reveal continued demand for drilling units and higher day rates for rigs.

Rowan's most recent fleet status report was issued on April 23rd, and it provided updates on six of its units. The first was the news that one of Rowan's new drillships had commenced its contract with Repsol in offshore West Africa at a day rate of $619,000. In addition, units Rowan Mississippi, Hank Boswell, and Scooter Yeargain all commenced new contracts with Saudi Aramco at day rates 15%, 40% and 40% above the previous rates reported, respectively. The other notable contract renegotiation was the Ralph Coffman, at an effective day rate of $243,000, above the previous effective day rate of $227,000.

It seems as if the demand for Rowan Companie's drilling units is surging and Transocean is reporting similar growth.

Specifically, Transocean's April fleet status report highlights that the Transocean Marianas was awarded a four-well contract offshore South Africa at a dayrate of $370,000 ($118 million estimated backlog). The rig was previously idle. Further, the Transocean Arctic was awarded a two-well contract in the Norwegian sector of the North Sea at a dayrate of $519,000 ($83 million estimated backlog). The rig's prior dayrate was $419,000.

Of course, we won't know for sure if Transocean and Rowan have outperformed expectations to the same degree as Diamond until they report first quarter results. Rowan and Transocean are expected to report first quarter figures on the 6th and 7th of May respectively.

Foolish summary
Overall, it would appear that the offshore drilling industry slowdown is not taking effect as quickly as many analysts suspected it would.

Nevertheless, Diamond's management remains cautious on the company's outlook and it may take several quarters for a slowdown to show through into Diamond's, or indeed any other drillers' results. With this in mind, investors need to keep an eye out over the next few months to see if there are any changes within the industry.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


Rupert Hargreaves owns shares of Rowan Companies. The Motley Fool owns shares of Transocean. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers