For having been dealt as awful of a hand as offshore rig companies have during this prolonged downturn, Diamond Offshore Drilling (DO) has done a commendable job of playing it the best way possible. The company's efforts to manage costs and make its fleet of vessels as attractive as possible to draw any available work has helped keep its bottom line afloat for some time. This past quarter, Diamond maintained that track.
Here's a look at Diamond's most recent earnings report and what investors should be expecting from Diamond and the offshore industry in general over the next few years.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$295.5 million||$346.2 million||$374.2 million|
|Operating income||$0.5 million||($6.4 million)||$50.8 million|
|Net income||$19.3 million||($31.9 million)||$23.5 million|
It's quite astounding that Diamond Offshore is still squeaking out modest profits this far into the offshore industry's down cycle. It is a testament to management's ability to handle both its fleet and its finances. Granted, some of that net income result was a result of a significant one-time tax benefit that kept net income afloat, but it is indeed a better result than its peers, which are posting operating losses.
What is even more impressive is that Diamond has been able to secure enough work to keep a decent portion of its fleet on the water and, more importantly, get longer-term contracts that ensure some revenue visibility beyond the next few months. This past quarter, it was able to secure contract extensions for two of its best rigs that last into 2020 and even began reactivating a rig for a multiyear contract with Royal Dutch Shell starting next year. As it stands, 13 of the company's 17 rigs are either active or under contract and on standby. Perhaps contract rates aren't as lucrative as they were in the heyday of 2012-2014, but rigs on the water are bringing revenue and operating cash flow. As it stands, it has $2.2 billion in contracted backlog.
Speaking of the balance sheet, Diamond ended the quarter free-cash-flow positive and now has $430 million in cash sitting on the balance sheet. Its debt-to-capital ratio, net of cash, was a rather comfortable 24.9%, and it has no obligations for debt or newbuilds until 2023. Even under the direst conditions, it's hard to see this industry downturn lasting that long.
What management had to say
The highlight of the quarter was Diamond securing new work for its rigs, so it's no surprise that CEO Marc Edwards promoted that as part of its press release. What should be encouraging for investors, though, is that he suggested we could see even more contracts and extensions in the coming quarters: "Despite the continuing challenges in the offshore drilling market, we were able to secure additional work for the Ocean Apex and the Ocean BlackRhino, and were awarded new work for the Ocean Endeavor. We continue to have strong interest from prospective clients for our industry-leading fleet."
Slow and steady winning the race
Diamond's management has been ultraconservative over these past few years. When other companies were planning massive fleet expansions, Diamond kept rather quiet and focused on keeping a clean balance sheet. I don't know if we can say that management foresaw this oil price crash and the lack of activity in the offshore rig world, but their strategy has been perfectly tailored for this market.
While exploration and development work is still well below the levels we have seen in prior years, there are signs that producers are willing to spend a bit more on offshore (oil prices above $70 will do that). It will likely take a couple of years before the glut of rigs gets put back to work, which means there isn't any rush to build new rigs.
That said, it wouldn't be surprising of Diamond were to make an acquisition sooner than later. It certainly has the financial standing to pull off a deal, and there are plenty of distressed companies in this industry that could unload a rig or two for the cash. I don't know if that is enough of a reason to make shares of Diamond Offshore a buy right now, but it is a dirt cheap stock for someone willing to wait a few years for the payoff.