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Top Energy Stocks in 2012: Diamond Offshore

By David Smith - Dec 7, 2012 at 4:22PM

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Diamond Offshore is an ideal way to play the world's cascading quest for offshore oil.

As New Year's Eve quickly approaches, and we prepare to make our 2013 investing resolutions, it is a good time to reflect on the energy sector in the year that was 2012. In this December series, our writers will be recapping some of the most popular, highest-performing stocks in this sector. We will examine whether the gains these companies provided their shareholders in 2012 are sustainable, or whether they merely can be attributed to one-time events or fizzling trends. Consider these pieces as gifts to benefit our Foolish, long-term investors seeking exposure to the energy sector. Enjoy, and Fool on!

As we move toward 2013, and despite the successful development of the Eagle Ford, the Bakken, and other nascent venues onshore in the U.S., the bulk of the global quest for meaningful new discoveries of crude oil is moving into progressively deeper offshore waters. On that basis alone, it's clearly appropriate for Foolish investors to remain cognizant of the goings-on in the worldwide offshore drilling industry.

Drill, baby, drill
There are several companies in the group that today merit your time, attention, and perhaps your investing shekels. Among the more compelling is Diamond Offshore (DO), the second-largest of the offshore companies -- to Transocean (RIG 6.40%) -- and an active player in virtually all of the significant worldwide traditional and deepwater plays. In that context, I'm including the U.S. Gulf of Mexico, Mexico's portion of the same body of water, the deepwater pre-salt plays of Brazil and Angola, and the South China Sea, among other locations.

Among Diamond Offshore's customers are the likes of Royal Dutch Shell (RDS.B), Norway's Statoil (EQNR 0.71%), and Chevron (CVX 1.64%). Of the dozen rigs it has deployed to Brazil, eight are in the employ of the company's state-controlled oil company, Petrobras (PBR -1.35%). Of the six units the company currently has under construction, four will be capable of drilling in water depths to 12,000 feet, making them able to operate in any of the world's emerging deepwater plays.

Obviously, the key to the investment attractiveness of offshore drillers lies in the demand for their services and the resulting dayrates they're able to garner. It's therefore a positive sign for Diamond Offshore and its shareholders that the company's utilization percentages, its backlog, and its daily contract rates all appear to be strengthening.

Market strength
Indeed, on the company's more recent post-release conference call, Michael Acuff, Diamond's senior vice president for contracts and marketing, said that "the offshore drilling market remains robust, as we continue to see steady-to-increasing activity as a result of the strong commodity pricing in the world market today."

Specifically, Acuff pointed to a contract recently signed for its Ocean Endeavor, a 10,000-foot-capable rig, currently working offshore Egypt, that is contracted to receive a day rate boost from the current $285,000 to $505,000, plus a potential 6.6% bonus. As he further noted: "With respect to ultra-deepwater pricing, recent fixtures in the market continue to demonstrate that rates for three-year deals are hovering around the $600,000 per day mark, with West Africa fixtures typically higher by another $20,000 to $30,000 a day."

He also noted that, with regard to deepwater demand, pricing momentum "has now taken us over the $500,000 per-day mark for work under a year." Among the venues where ultra-deepwater and deepwater demand has been expanding, Acuff pointed to the U.S. Gulf of Mexico, where, as he said, activity levels are approaching "pre-Macondo" levels.

Solid parentage
I'm convinced that, all too often, investors pay insufficient attention to the histories of the companies they're considering for their portfolios. In Diamond Offshore's case, however, it just might be that, since I once trod the halls of one of its predecessor companies, I find it noteworthy that the company today is an amalgamation of three pioneering offshore drilling contractors: Ocean Drilling and Exploration Company (ODECO), Diamond M Company, and Zapata Offshore. The helm of Zapata was once manned as CEO by former U.S. President George H. W. Bush.

Investors with an interest in Diamond Offshore, which operates as a subsidiary of Loews Corporation (L 3.02%), should also note that its board of directors has made a recent practice of distributing special quarterly dividends of $0.75 per share, along with regular quarterly dividend of $0.125 a share. As a result, Diamond sports a healthy trailing dividend yield of 5.10%.

A Foolish takeaway
Given the rapidly expanding world of offshore oil and gas exploration and production, I'm inclined to urge Fools to consider including solid offshore drilling representation in their 2013 portfolios. For my money, Diamond Offshore should be included among the companies considered for that role.

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Stocks Mentioned

Chevron Corporation Stock Quote
Chevron Corporation
$144.77 (1.64%) $2.34
Petroleo Brasileiro S.A. - Petrobras Stock Quote
Petroleo Brasileiro S.A. - Petrobras
$10.95 (-1.35%) $0.15
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
Diamond Offshore Drilling, Inc. Stock Quote
Diamond Offshore Drilling, Inc.
Statoil ASA Stock Quote
Statoil ASA
$32.54 (0.71%) $0.23
Transocean Ltd. Stock Quote
Transocean Ltd.
$3.49 (6.40%) $0.21
Loews Corporation Stock Quote
Loews Corporation
$59.77 (3.02%) $1.75

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

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