The past few quarters have been an up-and-down ride for Diamond Offshore Drilling (NYSE:DO). Just when it started to look like its business had hit the bottom and revenue was rising again, it encountered a few bumps along the way that have led to another year of declining revenue.
The good news is that even though revenue is still declining, it is building up its backlog of work with new contracts. The company's efforts to upgrade its fleet and implement new operating practices have made its rigs much more attractive to clients, and that is helping the company scoop up the scant amount of work in the offshore industry today.
Let's take a quick look at Diamond's most recent earnings results and some of its recent management moves that have made its fleet an attractive option for producers.
By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$232.5 million||$286.3 million||$346.2 million|
|Operating income (loss)||($37.3 million)||($230 million)||($6.4 million)|
|Net income||($79.2 million)||($53.1 million)||($31.9 million)|
Coming into this quarter, it was pretty much expected that the company was going to post a decline in revenue. It has secured several contracts for its rigs, but many of them don't kick in until 2019 or later. Based on the contracts it signed this past quarter, we can probably expect the same thing in early 2019 as well. Diamond reported that it had added 33 months worth of work to its backlog, which now stands at $2 billion.
What management had to say
One of the things Diamond Offshore prides itself on is investing in new technologies and implementing business models to improve productivity and reduce downtime. It started with a new contract model with some of its crucial equipment suppliers in which it rents things like blowout preventers from the manufacturer instead of owning them. The aim is to incentivize the manufacturer to keep the equipment better maintained, requiring less downtime. Diamond has also implemented blockchain technology along its logistical supply chain for better transparency and data flow.
While there weren't any novel technology announcements this past quarter, CEO Marc Edwards detailed how these investments were leading to better outcomes for its clients and how they should help differentiate Diamond from the rest of its peers:
I have previously mentioned how such innovation during 2018 reduced [blowout preventor] downtime on this complex piece of equipment to less than 1%, how we have delivered 31,000-foot wells here in the Gulf of Mexico up to 54 days ahead of schedule, and how we have reached drilling depths of 28,000 feet in only 38 days. This is best-in-class performance. But how does this translate as a benefit to our clients?
As you know, two of our drillships have been working as the sole drilling contractor on a significant development project in the Gulf of Mexico. Diamond Offshore has exceeded expectations on this development by delivering first oil six months ahead of schedule and $1.2 billion, or some 20%, under budget. During this program, and according to independent third-party data supplied by the client, our drillships delivered three of the four most-efficient drilling curves in the deepwater Gulf of Mexico to date. In other words, normalized for well depth, we have recently manufactured for the client three of the four most cost-effective deepwater wellbores, which were at the same time some of the deepest and most difficult drilled in the region. And this record drilling performance has not come at the cost of safety, as 2018 represented the safest year in Company history.
Drilling efficiency is a two-sided coin for rig owners
All of the things that Edwards mentioned above are great news for offshore oil drilling. More-efficient operations mean lower costs and will help offshore be more cost-competitive with other sources, such as shale. There is one drawback, though, and we're seeing it play out with North American land drilling. The gains in drilling efficiency mean it takes a lot less time to do the same work, but for the most part, day rates have not increased with the reduced drilling times. That has led to lower overall revenue. If offshore drillers start to see the same kind of efficiency gains, will they be able to push day rates high enough to compensate for the shorter amount of drilling time?
For a business that is built on day rates, drastic reductions in drilling times can cut both ways. It may make Diamond's rigs more attractive to potential customers and allow the company to command a premium, but it may not be enough to offset the lost revenue from shorter drill times. This will be a fascinating dynamic to follow in 2019 as Diamond starts to put more of its rigs to work, and we'll see whether it starts to contemplate new revenue models.
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