Image source: Diamond Offshore drilling.
Offshore drilling companies have suffered mightily over the past couple years, and to keep the lights on they have all had to get very aggressive at cutting costs and getting rid of sead weight equipment. So far, Diamond Offshore Drilling (DO) has done a rather commendable job of doing this as it keeps its finances in check. This quarter, though, the company announced some very creative ways to cut costs and improve operational efficiency. Let's take a quick look at the company's results as well as look at some of the moves Diamond made to keep afloat in this tough market.
By the numbers
| Metric | Q4 2015 | Q3 2015 | Q4 2014 |
|---|---|---|---|
| Revenue | $555.5 | $609.7 | $675.3 |
| Operational income | ($340.1) | $181.4 | $162.1 |
| EPS | ($1.79) | $0.99 | $0.72 |
Source: Diamond Offshore earnings release. Numbers in millions, except per-share results.
One thing to consider when looking at these results is that Diamond took a $499 million asset writedown on several of its older rigs. If we were to strip out the pre-tax losses related to this non-cash writedown, then earnings per share would have come in at $0.89 per share, above analyst expectations for the quarter. Here's a quick breakdown of the operational performance of the company's different asset classes.
| Type | Average Dayrate | Utilization Rate | Operational Efficiency | Average Dayrate | Utilization Rate | Operational Efficiency |
|---|---|---|---|---|---|---|
| Q4 2015 | Q3 2015 | |||||
| Ultra-deepwater floaters | $531 | 70% | 95.5% | $479 | 71% | 96.8% |
| Deepwater floaters | $337 | 42% | 97.7% | $361 | 59% | 90.3% |
| Midwater floaters | $249 | 24% | 97.8% | $289 | 31% | 97.5% |
| Jack-ups | $124 | 17% | 100% | $97 | 31% | 99.8% |
| Type | Average Dayrate | Utilization Rate | Operational Efficiency |
|---|---|---|---|
| Q4 2014 |
|||
| Ultra-deepwater floaters | $493 | 66% | 90.2% |
| Deepwater floaters | $431 | 48% | 97.3% |
| Midwater floaters | $270 | 55% | 96.8% |
| Jack-ups | $96 | 77% | 99.5 |
Source: Diamond Offshore earnings release. Dayrates in thousands.
Diamond's business update
- The company achieved a 97% operational efficiency rating for the quarter, which means the rigs under contact were down for maintenance and repairs 3% of the time, a solid result for any offshore company.
- All of Diamond's sixth-generation assets, which are its higher-margin floating rigs, are contracted to at least 2019. Giving it some added cushion to survive this downturn.
- The board of directors elected to eliminate its regular quarterly dividend, which was previously $0.125 per share. This move will add an additional $69 million per year of liquidity for the company. Not much, but a brutal market like this requires any spare cash it can get.
- The company entered into an agreement with General Electric's (GE -0.60%) oil and gas division, whereby GE will buy back blowout preventers from Diamond and will in exchange rent them out to Diamond at a daily rate. The deal is intended to reduce downtime for repairs and inspections of blowout preventers as well as put some skin in the game for equipment manufacturers.
Management's view
The market for offshore rigs is pretty much a flaming disaster right now, which is why the company is preserving capital by eliminating its dividend. However, CEO Marc Edwards gave some reasons investors should be a little more optimistic:
Despite the market turmoil, during 2015, we delivered record-breaking performance as it relates to both safety and uptime. And our early efforts to position the company for a protracted downturn proved fruitful in terms of reducing input costs, which fell through to the bottom line midyear. We are continuing to look at innovative ways to further reduce costs and drive efficiencies for the benefit of our clients and our shareholders. This philosophy is what led to our announcement this morning of the industry's first subsea Pressure Control by the Hour construct.
[W]e are unfortunately yet to see any signs of improvement in the offshore rig market fundamentals. All asset classes are struggling, but as I've said before, the higher-end dynamically positioned fifth- and sixth-generation market has the biggest problem. But on a positive note, and as you are aware, all of our sixth-generation assets are contracted to 2019 or beyond. The market will recover as oil supply and demand fundamentals come into balance, but we believe that due to the long lead times in the deepwater space, any uptick in activity could be further over the horizon than current consensus.
What a Fool believes
There were two important takeaways from Diamond's earnings results. One is that the company is managing its fleet in the right way by keeping its newer, more capable rigs employed at higher rates and taking its less desirable assets off the market to go to the scrapyard. The other is that the company is still tightening its belt by cutting operational costs and getting rid of its dividend. The General Electric deal is one component of the company's cost-cutting efforts, but it's certainly something that could have some industrywide implications if it proves to be popular and economical for all parties involved.
Going forward, investors should continue to watch how the company does in keeping its higher performing assets working and keeping its costs in check. Having contract coverage out to 2019 sounds great, but as we have seen during this market downturn, contracts aren't necessarily sacrosanct.
