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Has the Market Lost Its Moorings on the Drillers?

David Smith
May 3, 2013

For those of us who follow the equities markets closely, valuations -- which, after all, are simply reflections of the sentiments of those willing to put their investment money where their mouths are -- occasionally appear to represent a strange coalescence of inexplicability and folly.

For instance let's take a gander at the P/E multiple accorded to The New York Times Company (NYSE: NYT), producer of the famous -- or perhaps infamous -- Grey Lady. The readership of the Times' properties, and consequently related advertising revenues, have for years tumbled like so many gold-medal gymnasts. Then let's compare that valuation to what is accorded deepwater drilling contractor Diamond Offshore (NYSE: DO).

You can buy dozens of Solyndras cheap
Despite its declining fortunes, The New York Times Company boasts a 20-times forward P/E multiple. In the face of its atrophying circumstances, its directors (appropriately) have eschewed any sort of dividend, giving its shares a yield that fluctuates between zip and nada.

By contrast, the Houston-based driller is active globally, often in water depths of 10,000 feet or more. It routinely forks over as much for a single new deepwater drilling unit as our friends in the federal government frittered away backing solar "star" Solyndra.

Diamond's board has regularly declared special $0.75 quarterly cash dividends, giving it a forward yield of an unremarkable 0.70%. But with the special dividend largesse, its trailing yield sits above 2.60%. For all this, the company's forward P/E is slightly above nine times, or less than half that of the floundering Times Company.

When the two companies reported last week, Times executives told us that their company's adjusted per-share earnings had slipped by 20%. That, despite palaver about all manner of steps to reposition (read: reinvent) the company.

But, sticking with per-share metrics, Diamond Offshore recorded $1.27 for the quarter, from $1.21 and topping the Wall Street seers' consensus forecast of $1.15. That beat works out to a commendable 10%.

Contrasting futures for the companies
There's also the important consideration of the likely futures of the two companies. I know, I know, Times' circulation grew by nearly 7% in the quarter, led by "continued strength in our digital subscription initiatives." But digital customers' brand loyalty is far more evanescent than that of readers who actually grip their daily fish wrappers between their fingers.

In noting the expanding strength of offshore drilling demand, Diamond Offshore CEO Lawrence Dickerson touched on an intriguing area of growth on his call last week. That is, numerous countries that have been on the offshore exploration sidelines heretofore are beginning to rethink their stances. For instance, Diamond is mobilizing a rig to Latvia; that's right, Latvia. The gearing up of a host of new energy entrants is bolstering what Lawrence referred to as the "mid-water market."

Think about it: 10 years ago the Gulf of Mexico was thought to be headed for oblivion, only to be revived mightily by technology that opened up the deepwater. Activity in Brazil was minimal, and now Diamond Offshore has a baker's dozen rigs working there, most in the deepwater and ultra-deepwater for Petrobras (NYSE: PBR).

Beyond that, Mexico's showing signs of new life. Angola's suddenly found pre-salt reserves much like Brazil's, and the South China Sea is awakening and could become extre