You know all too well that the offshore drilling contractors have been heading progressively deeper operationally during the past several decades. Unfortunately for more than a few investors, however, the share prices of some members of the group have also been on a downward arc.
Diamond Offshore (NYSE: DO ) is easily the biggest offender in this regard, having seen its share price plummet by 22% in the most recent two-year timeframe. Stretch that period to five years, and you precisely double the company's slide. Conversely, Ensco's (NYSE: ESV ) shares have improved by 12% since mid-2012. Transocean (NYSE: RIG ) and Seadrill (NYSE: SDRL ) fall in the middle, with a two-year decline of nearly 2% and a 6% rise, respectively.
So what ails Diamond? And is there hope for share price levitation at the company during any of our lifetimes?
Before I attempt to deal with those queries, full disclosure necessitates that I admit -- albeit with a modicum of sheepishness -- that I once trod the halls of a predecessor of Diamond Offshore as a junior officer, not long after I'd been sprung from graduate school. That admission represents more than simply a laying of my cards on the table, however; it indicates something of an unusual perspective that may be beneficial to our look the company.
Rigs from yesteryear
While Diamond Offshore appears to be anything but a totally lost cause, part of its problem clearly lies in the relative age of its fleet. Indeed, it was hardly yesterday that I was a Diamond "hand," so it's especially noteworthy that, as I examine the company's most recent rig status report, fully 18 of its 45 offshore rigs predate or coincide with my employment with the company. That stint occurred back when relatively early generation semisubmersibles that could operate in 1,500 feet of aqua were the hottest thing on, well, the water.
My colleague Joshua Bondy further quantified this issue not long ago when he noted that the average build year of Diamond Offshore's fleet is 1992. In contrast, if you include units currently under construction, Seadrill's average build year dates back only three years. (Transocean's fleet is no spring chicken, even when compared with Diamond's. Ensco's is more youthful, but it's still senior to SeaDrill's.)
Part of this issue may stem from Diamond Offshore's history. It's heritage includes a marriage of two longtime towers of the industry, Ocean Drilling and Exploration Co. (ODECO) and Diamond M Company. In 1992, Diamond M -- one of the few companies to have been named for a Texas ranch -- acquired its New Orleans-based rival. And as the company says on its current website, of the 39 rigs it bought in the deal, "half remain in our fleet today." That amalgamation of two fleets obviously obviated the need for wholesale construction, at least for a while.
But that's not to imply that the company continues to rest on its laurels. Since 2000, it's converted five midwater rigs into ultradeepwater units. It's also acquired a pair of ultradeepwater semisubmersibles and ordered the construction of seven new deepwater and ultradeepwater rigs.
A dayrate slippage is likely
More recently, Diamond Offshore has had to contend with Statoil's cancellation of contract for the employment of the Ocean Vanguard, a 1992 vintage semisubmersible located in the North Sea. Diamond is disputing the brush-off and the accompanying loss of a $454,000 dayrate. But since the deal covered a period set to conclude late next February, this issue will hardly break the driller.
Unlike Statoil, Total isn't shedding offshore drilling contractors, however. Indeed, the big French company has recently signed contracts carrying dayrates of $600,000 or more with both Ensco and Seadrill. But despite those lofty levels, my betting, along with most others who monitor the industry, is that the dozens of deepwater and ultradeepwater units under construction will almost certainly precipitate a downward bias in dayrates during the next few years. To the extent that that prediction proves accurate, it'll hardly inure to the benefit of Diamond Offshore and its peers.
So, before concluding, let me respond to the second question posed in the third paragraph above. I'll do so by simply stating that, while I believe that Diamond Offshore is essentially a solid and solidly managed company, I'm inclined to sit on my wallet vis-a-vis the offshore drillers today. I say that, despite my current ownership of shares in Transocean. In fact, while I believe that all portfolios can benefit from the inclusion of oil-field-services names, I'm far more inclined to fill that bill by owning at least one of the big, geographically diverse, multiservice providers.
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