Diamond Offshore Drilling (DO)
Diamond Offshore Drilling, Inc. (NYSE:DO) rents drilling rigs to gas and oil companies most in the Gulf of Mexico and Asia. From 2003 to 2006, the company's revenues increased nearly three fold, as the worldwide demand for energy and geopolitical conflicts in oil-rich nations have driven up the price for oil. Higher oil prices allow companies involved in the exploration and production (E&P) of fossil fuels to drill in once prohibitively expensive locations.
As E&P firms are drilling ever deeper under the ocean--at depths exceeding 1000 feet--Diamond Offshore is especially well-positioned to benefit from a continued rise in deepwater drilling. Diamond owns one of the largest drilling fleets in the world (a total of 44 ships), and rents out its ultra-deep drilling rigs (4,000+ feet) for up to $380,000 per day. One mostly uncontrollable factor for DO or any other company involved in offshore drilling in the Gulf of Mexico is the threat of hurricanes, which can shut down production for several days and also damage drilling rigs.
[edit] Company Overview
Diamond Offshore Drilling (DO) rents drilling rigs to gas and oil companies. DO earns revenue through dayrates collected by its rigs as specified in its contracts with oil companies. Revenues have climbed in recent years due to the increase in gas and oil prices, which have stimulated the exploration and drilling activity for these fossil fuels. [1] The upkeep and upgrades of rigs make up most of its operating expenses.
Diamond's rigs are used to find new oil or gas deposits, or to prepare existing deposits for production. [3] DO owns one of the largest drilling fleets in the world, a total of 44 ships, including 30 semisubmersibles, 14 jack-ups and one drillship.[4][5]
- Jack-ups are stationary units operate at water depths of up to 400 feet, so they are more commonly used in shallower waters, like the continental shelf of the Gulf of Mexico. DO's jack-ups were earning dayrates of $60,000 to $170,000.[6]
- Semisubmersibles are floating units that can operate at water depths of up to 10,000 feet. Because of their greater capabilities, the demand for semi's has increased as interest in deep water drilling and exploration grows. The most advanced, high-specification floaters, which can drill at over 4,000 feet, earn dayrates up to almost $400,000. Earlier generation semisubmersibles, which drill up to 4,000 feet, earn up to $350,000. As of November 26, 2007, DO’s deepwater semisubmersibles were earning dayrates ranging from $250,000 to $380,000.[7]
It is important to note that while DO's intermediate submersibles earned more revenues than DO's high-specification floaters, DO has only nine high-spec rigs compared to 21 intermediate semi's.[8] It is clear that rigs with deeper drilling capabilities are earning the most money.
[edit] Regional Activity
DO drills in several regions around the globe, but it is especially prominent in the Gulf of Mexico (GOM) and Asia Pacific. As international demand for deepwater drilling increases, dayrates for rigs like DO’s semisubmersibles are also climbing.
[edit] Key Trends and Forces
- Gas and Oil Prices: Increase in gas and oil prices will not only encourage gas and oil companies to find more gas and oil deposits and to drill more from existing deposits, but rising prices will also enable these companies to spend more money on exploration of new deposits. A global increase in demand for oil in regions such as China has sustained increasing gas and oil prices, which in turn drive demand for drilling rigs. In the near term, rising gas and oil prices drive up dayrates[11] and utilization rates[12] for rigs. From 2000 to 2006, the inflation adjusted price of oil has increased from $32.26 a barrel to $60.78 a barrel (an 88% increase). [13] Over the same period, international floating rig utilization has risen from about 80% to almost 100%.[14] The rate at which existing deposits are depleted will also affect the demand for rigs as the need for exploratory work intensifies.
- Drilling in Deeper Waters: Higher oil prices makes it more economically feasible to go after deposits in locations too expensive previously. Oil exploration efforts have found promising deposits in deep waters, which are attainable using Diamond's rigs. The average dayrates for rigs that can operate at water depths of 1500-4000 feet are around $200,000 to $300,000. As more advanced rigs can charge higher rates for longer periods of time, DO has followed a policy of continually upgrading their rigs instead of building the same ones. DO currently has nine rigs that can operate at over 4000 feet in water depth and 21 more that can operate at up to 4000 feet in water depth.[15]
- Severe Weather Conditions: Offshore drilling is adversely affected by severe ocean weather conditions. Storms can delay or even terminate the operation of a rig and rig utilization is usually much lower during hurricane season in prone areas such as the Gulf of Mexico. In 2005, hurricanes Katrina and Rita ripped through the GOM, and the company recorded a $33.6 million casualty gain for removal of one of their jack-ups, the Ocean Warwick, which was damaged by the hurricanes. Other damages to DO's ships and facilities amounted to $2.6 million.
[edit] Competition
The drilling industry is highly competitive and the the cyclical nature of the oil industry subjects companies to intense pricing competition during cycles of low demand and high supply of rigs. Companies that manage to retain the highest utilization rates are more able to experience longevity in the industry. High utilization rates means that rigs are contracted and making money. If rigs are not contracted, not only are they not earning revenue, they are costing the company resources needed to store these ships. DO has one of the highest utilization rates in the industry.
DO’s biggest competitors include:
- Transocean (RIG) is based in the U.S. and is the world's largest offshore drilling contractor. It has a fleet of 147 ships, ranging from shallow water jack-ups to the highest-specification deepwater drilling rigs.[16]
- ENSCO International (ESV) has a fleet of 46 rigs, 44 of which are jack-ups. It has one ultra-deepwater semisubmersible and one barge rig.[17]
- Noble (NE) has a fleet of 56 rigs: 3 drillships, 3 submersibles, 13 semisubmersibles, and 37 jack-ups.[18]
- Pride International (PDE) has a fleet of 56 rigs: 2 drillships, 12 semisubmersibles, 28 jack-ups, 3 tender-assisted rigs, 1 barge rig and 10 platform rigs. PDE also has 7 land-based rigs.[19]
[edit] Market Share
Of DO's fleet, only 35 are actively drilling according to http://www.rigzone.com. Here is a comparison of DO's market share of active rigs and its major competitors:
- ↑ (DO) Form 10-K, Fiscal year 2006, "Delving into the Deep", p.12
- ↑ http://finance.google.com/finance?fstype=ii&q=NYSE:DO
- ↑ http://www.diamondoffshore.com/ourCompany/ourcompany_offshorebasics.php
- ↑ (DO) Form 10-K, Fiscal year 2006, "The Fleet", p.3, pp.15-17
- ↑ http://www.diamondoffshore.com/ourCompany/ourcompany_offshorerigbasics.php
- ↑ http://www.diamondoffshore.com/ourFleet/documents/November262007web.xls
- ↑ http://www.diamondoffshore.com/ourFleet/documents/November262007web.xls
- ↑ (DO) Form 10-K, Fiscal year 2006, "The Fleet", p.15
- ↑ (DO) Form 10-K, Fiscal year 2006, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", pp.36-38
- ↑ (DO) Form 10-K, Fiscal year 2006, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", pp.36-38
- ↑ http://www.rigzone.com/data/dayrates
- ↑ http://www.rigzone.com/data/rig_report.asp?rpt=mgr
- ↑ (DO) Form 10-K, Fiscal year 2006, "Delving into the Deep", p.12
- ↑ (DO) Form 10-K, Fiscal year 2006, "Delving into the Deep", p.9
- ↑ (DO) Form 10-K, Fiscal year 2006, "The Fleet", p.15
- ↑ http://www.deepwater.com/fw/main/default.asp
- ↑ http://www.enscous.com/default.aspx
- ↑ http://www.noblecorp.com/about/aboutfrX.html
- ↑ http://www.prideinternational.com/rigfleet/type.htm
- ↑ RIG 2007 10-K
- ↑ NE 2007 10-K
- ↑ RDC 2007 10-K
- ↑ ESV 2007 10-K
- ↑ http://www.rigzone.com/data
]
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