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This Drilling Stock Is Recovering

By Isac Simon - Updated Apr 7, 2017 at 5:01PM

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First-quarter results indicate that this company is the recovery path.

The offshore drilling industry is recovering. Shallow-water drilling seems to be making a comeback. Diamond Offshore Drilling (NYSE: DO) beat analysts' estimates to post healthy first-quarter results. And this is not a company that focuses solely on ultra-deepwater drilling.

On the road to recovery
While ultra-deepwater drilling is arguably the most lucrative segment in the industry, management at Diamond oversaw a decent quarter, thanks to some astute cost-cutting and better rig utilization rates. Total drilling revenue came in at $755 million, which is a 4% drop from last year's first quarter. However, this represents 3% growth over last year's fourth quarter. While on a year-on-year basis things don't look too impressive, what's evident is that the company is making progress after falling behind in the previous quarter. Total operating income stood at $265.4 million, which is 17% lower than that of the year-ago quarter, but a healthy 22% improvement on a sequential basis.

Astute management
Gross margins improved sequentially by almost 3 percentage points to 47.4%, which is proof that the company is doing a decent job of keeping costs low. It's not that management came up with some ingenious methods to cut costs or had to trade off some essential expenses related to safety. Instead, the company ramped up its efficiency in its normal operations by clamping down costs in supply and repairs.

Additionally, rig utilization rates have been impressive. With as many as 15 rigs stationed off the shores of Brazil and at least 10 of them contracted till 2014 and beyond, there's no question of rigs being cold-stacked. And the best part is that the rigs aren't all suited for the ultra-deepwater drilling. Brazil's state-owned Petrobras (NYSE: PBR) is operating nine rigs (including three with ultra-deepwater-drilling capabilities) with six of them contracted till beyond 2014.

However, I'm not too impressed with the status of Diamond's rigs stationed in the Gulf of Mexico, where five of the eight unutilized rigs are located. This is explained by the lousy market conditions in this region. Hercules Offshore (Nasdaq: HERO) has 18 rigs idling in the Gulf, and this has affected the company's performance. But this is an improvement and Hercules is fetching higher dayrates as well. Still, it's high time that these drillers move out of the Gulf given that international offshore drilling is just picking up.

Foolish bottom line
All in all, Diamond Offshore is making good progress, and I believe it will continue to do so. This year, its stock has actually jumped 21%, which is a good sign. We at The Motley Fool will help you stay up to speed on the top news and analysis on Diamond Offshore. You can start subscribing now by adding the company to your free watchlist.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Diamond Offshore Drilling, Inc. Stock Quote
Diamond Offshore Drilling, Inc.
Petroleo Brasileiro S.A. - Petrobras Stock Quote
Petroleo Brasileiro S.A. - Petrobras
$11.15 (3.72%) $0.40
Hercules Offshore, Inc. Stock Quote
Hercules Offshore, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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