Should You Be Picking Up a Deal on Downtrodden Diamond Offshore Shares?

Diamond Offshore's shares have fallen steadily in the past few years. Is it time to place a buy order on the depressed company?

Jul 15, 2014 at 1:00PM

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.

Foolish takeaway
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.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

David Smith owns shares of Transocean. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and 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 fool.com.

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 www.fool.com/beginners, 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 www.fool.com/podcasts.

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