Offshore drilling giant Diamond Offshore Drilling (NYSE:DO) announced very good first-quarter results before the market opened on Thursday, April 24. Yes, I am saying that these results were still quite good despite the year-over-year revenue and net income declines.

One reason for this is that despite a spate of Wall Street downgrades on all the companies in the industry, Diamond Offshore's top- and bottom-line numbers held up pretty well. Second, when we take a look at the actual causes for the year-over-year declines, we see that the numbers were better than they appear at first glance. The market apparently agreed, and shares of Diamond Offshore surged following the earnings announcement.

Highlights from the earnings report
As is my usual practice when I do an earnings analysis, I would like to share the company's numbers with you to put the remainder of this article into context. In the first quarter, Diamond Offshore reported total revenue of $709 million, down slightly from the $730 million that the company reported in the first quarter of last year.

Revenue was also down slightly from the $726 million that Diamond Offshore reported in the fourth quarter of 2013. However, Diamond Offshore's net income increased significantly from the fourth quarter, climbing from $93 million to $146 million. This is a 57% increase! Unfortunately, the company's net income was lower than it was a year ago, falling from $176 million.

Depreciation's adverse impact
One reason why the company saw its net income decline is because it incurred higher depreciation expenses in the first quarter of 2014 compared to the first quarter of last year. In the first quarter of 2013, Diamond Offshore incurred total costs of $96.8 million due to depreciation. This rose to $107 million in the latest quarter.

However, here's the thing about depreciation: It is a non-cash expense. That means that no money actually left the company to cover this cost. Instead, depreciation is intended to represent the reduction in value that occurs to the company's fixed assets as they wear out over time. In the case of Diamond Offshore, these assets are mostly the company's drilling rigs.

But, here's the rub: An offshore drilling rig continues to work long after it has been completely written off due to depreciation. Thus, the company's depreciation costs are actually much higher than the rig's actual reduction in value. If the increase in Diamond Offshore's depreciation year over year is removed, then the company would have only seen its net income fall to $156.1 million from approximately $176 million.

Increasing rig dayrates
One of the more promising things in the company's earnings report was the fact that it has been seeing increasing dayrates. Since news of the slowdown in the drilling industry has been consistently stated by Wall Street analysts, the ultra-deepwater sector has been most affected, largely because of its higher costs relative to shallow-water drilling.

However, Diamond Offshore reported that the average dayrate earned by the ultra-deepwater rigs in its fleet increased 11% quarter over quarter. This means that in the first quarter, the average ultra-deepwater rig in the company's fleet generated higher revenue for Diamond Offshore than it did in the fourth quarter. In addition, Diamond Offshore reported that the average dayrate for its deepwater rigs also rose by 4% compared to the fourth quarter.

Reduced utilization
So, why did Diamond Offshore's revenue decline if the average dayrate went up? Well, the main reason is that fewer of the company's rigs were actually working. Diamond Offshore saw its fleet utilization fall significantly from the fourth quarter. In the fourth quarter of 2013, Diamond Offshore's fleet was running at 91% of maximum capacity. However, the company's fleet was only operating at 64% capacity in the most recent quarter. This means that Diamond did not do a particularly good job at maximizing its profits in the quarter, mostly due to all the old rigs that it has in service that are uncontracted.

Of course, this also means that the company could produce significant growth above its current level once rig demand returns, which could be as early as later this year.

New rigs provide confidence
Diamond Offshore has two new rigs coming online later this year that have already secured contracts. These rigs will increase the company's revenue once they begin operating. The first of these rigs, the Ocean BlackHornet, is scheduled to start operating in the third quarter at a dayrate of $495,000; the second rig, Ocean Apex, is scheduled to begin operating in the fourth quarter at a dayrate of $485,000.

However, the company has several other rigs that come off contract in 2014 that it will need to secure contracts for in order to avoid seeing more revenue declines throughout the year. Diamond's success at securing four short-term contracts (and a few long-term ones) recently increased confidence in its ability to do this.

If you don't want to take on the risk of Diamond Offshore not finding new contracts, then there are other companies that you can invest in. North Atlantic Drilling and Seadrill Partners, for example, have no need to secure rig contracts for any of the rigs in their fleets this year, and both have competitive dividend yields.