What: After rallying 25% in April, offshore driller Diamond Offshore Drilling Inc (NYSE:DO) stock fell another 15% in June, continuing a downward spiral that's been ongoing for several years:
So what: Over the past month or so, however, the entire offshore drilling industry has seen pretty significant correlation in its stock prices:
The biggest outlier, Ocean Rig UDW, is down far and away the most, but largely because of a secondary share offering that diluted its investors by 21% of their ownership. For the rest, it's really just the result of a lack of any good news, either for the whole industry, or materially for any one company.
Now what: Same song, next verse. Offshore drilling remains an ugly business to be in right now, with very little new demand for drilling as global oil demand growth remains weak, while cheaper onshore production continues to meet the need for what little growth there is.
The bottom line is that Diamond Offshore is in a similar boat as the rest of the industry in terms of feeling the pinch of weak demand, but it's boat is relatively old. The company has one of the oldest fleets in the industry, and so far hasn't taken the same initiative that Transocean and other have to scrap older vessels and replace them with newer, more capable ones.
While there's some risk for ordering too many newbuilds -- I'm looking at you, Seadrill -- and using too much debt leverage to pay for them -- still looking at you, Seadrill -- Diamond's older fleet is likely to have trouble competing against the newer, safer, and more capable vessels its competitors are putting in the water. This is especially true when it comes to operating in harsh environments and deep water.
On the other hand, the company's conservative approach to newbuilds means it is significantly less leveraged than its competitors, and this could be a huge benefit if oil prices -- meaning oil demand -- stay weak for a long period of time. While others have to make those debt service payments, Diamond will find it easier to cold stack or even scrap vessels that aren't seeing demand, reducing its costs until the market recovers.
All things considered, I'm still not investing any new money in offshore drillers right now because of the uncertainty around demand and oil prices. Until there are some clear signs of a recovery, there are simply better places to invest.
Jason Hall owns shares of Seadrill. The Motley Fool recommends Atwood Oceanics and Seadrill. The Motley Fool owns shares of Atwood Oceanics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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