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WIKI ANALYSIS
Diamond Offshore Drilling, Inc. (NYSE:DO) rents drilling rigs to gas and oil companies mostly in the Gulf of Mexico and Asia and is the second-largest contract driller by market capitalization.[1] From 2005 to 2008, the company's revenues increased nearly three fold, as the worldwide demand for energy and geopolitical conflicts in oil-rich nations drove up the price of oil. However, oil prices plummeted after a peak of about $140 per barrel in July 2008 and stabilized at about $75per barrel as of October 2009.[2] Falling oil prices reduce the revenue generated by oil companies and thus make drilling in deep-water locations prohibitively expensive. Declining demand for oil has had an adverse effect on the offshore drilling industry because lower oil prices reduce day rates earned by offshore drilling rigs. Additionally, declining interest in offshore drilling and oil exploration reduces contract activity.
Though Diamond Offshore Drilling has seen the effects of the economic downturn, it is partially shielded from decreasing day rates because most of its drilling rigs are contracted through 2010. Diamond owns one of the largest drilling fleets in the world (a total of 46 drilling rigs), and continues to rent its drilling rigs at steady dayrates. In the first quarter of 2009, the company's average dayrate for high specification floater rigs was $360,000 per day, compared to $386,000 in the fourth quarter of 2008.[3]
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 occur most frequently from June 1 to November 30. Hurricanes can shut down drilling rig production for several days and also cause significant damage to rigs.
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. Dayrates and utilization rates have fallen slightly as the demand for offshore drilling has declined, mainly due to the falling price of crude oil.[4] For example, the average dayrates for high specification floaters fell from $386,000 in the fourth quarter of 2008 to $360,000 in the first quarter of 2009 and utilization rates for jack-ups have plummeted from 92% to 73% over the same time period.[5] The upkeep and upgrades of rigs make up most of Diamond Offshore's operating expenses.
Diamond's rigs are used to find new oil or gas deposits, or to prepare existing deposits for production. [7] DO owns one of the largest drilling fleets in the world, a total of 46 ships, including 30 semisubmersibles, 15 jack-ups and one drillship.[8][9]
- Jack-ups are stationary units that 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 earned average dayrates of $131,000 in the first quarter of 2009, and 73% of DO's jack-ups were utilized during the first quarter.[10]
- Semisubmersibles are floating units that can operate at water depths of up to 10,000 feet. The most advanced, high-specification floaters, which can drill at over 4,000 feet, earned average dayrates of $360,000 in the first quarter of 2009. Earlier generation semisubmersibles, which drill up to 4,000 feet, earned average dayrates of $283,000 in the first quarter of 2009.[5]
- Diamond owns one drillship, the Ocean Clipper, which can operate at water depths up to 7,500 ft and can drill down to approximately 25,000 feet.[11] Drillships are self-propelled and are positioned over a drill site with an anchor or a dynamic-positioning system, similar to a semisubmersible.[12] As of January 2009, the Ocean Clipper was stationed off the coast of Brazil.[12]
Second Quarter 2009 Summary
Diamond Offshore reported second quarter net income of $387.4 million, down 6.9% from its net income of $416.2 million in the second quarter of 2008.[13] The company reported revenue of $946.4 million for the second quarter, down less than 1% from second quarter 2008 revenue of $954.4 million.[13] About 88% of Diamond's revenues are generated by contracts that were signed more than a year ago.[13] Though the company did not sign any large scale contracts in the second quarter of 2009, the company does control the utilization rates of its rigs and thus has some control over profitability.[13] Diamond also plans to improve profitability by aggressively controlling costs. For example, the company will save $10 million per quarter as a result of cluster stacking of three jack-up rigs in the Gulf of Mexico.[13]
In terms of its debt structure, Diamond Offshore has a debt to equity ratio of about 0.539, which is average for the drill rig industry. Diamond issued $500 million of debt in May 2009 and spent a large portion on the acquisition of the drilling rig Ocean Courage.[13]
| Q2 2009 Dayrate | Q2 2009 Utilization | Q1 2009 Dayrate | Q1 2009 Utilization | Q4 2008 Dayrate | Q4 2008 Utilization | Q1 2008 Dayrate | Q1 2008 Utilization | |
|---|---|---|---|---|---|---|---|---|
| High specification floaters | $381,000 | 79% | $360,000 | 80% | $386,000 | 89% | $323,000 | 87% |
| Intermediate semis | $286,000 | 93% | $283,000 | 85% | $284,000 | 78% | $249,000 | 85% |
| Jack-ups | $146,000 | 63% | $131,000 | 73% | $121,000 | 92% | $102,000 | 90% |
Key Trends and Forces
The global financial crisis limits investment in new drilling projects
Limited liquidity in credit markets resulting from the global financial crisis has reduced the amount of funding available for Diamond Offshore Drilling's business operations worldwide. Offshore drilling is a capital intensive business, and with limited credit options, DO is under pressure to finance its capital projects with cash flow instead of debt. The latest construction projects DO completed were the $186.8 million upgrade of the Ocean Monarch rig and the $266.3 million construction of two new jack-up drilling units, the Ocean Scepter and the Ocean Shield.[16]
However, the price of oil has fallen from a record high of almost $150 a barrel in July 2008 to around $70 a barrel as of September 2009, which has caused dayrates to fall significantly.[17] Though contract activity has declined since the global financial crisis began, DO is partially shielded from decreasing day rates. Most of DO's offshore drilling rigs are contracted through 2010, so the short term effects on DO are further buffered by existing contracts. Oil producers that are most affected by declining oil prices operate in the North Sea and the shallow regions of the Gulf of Mexico, two regions in which contract activity has slowed most significantly.
Increases in crude prices not only encourage gas and oil companies to drill for more oil, but rising prices also enable these companies to invest in the exploration of new deposits. Prior to the global financial crisis, an increase in the demand for oil in regions such as China had sustained increasing gas and oil prices. This increase in oil prices drove increased demand for drilling rigs.
In the third quarter of 2008, however, oil prices began to plummet due to the financial crisis. Oil trading companies stored the most oil in inventory in 20 years, totaling 80 million barrels aboard 35 supertankers and several smaller tankers.[18] However, demand for oil in developing countries such as China and India has the potential to raise oil prices in the future.
Severe weather conditions can damage offshore rigs and delay oil drilling
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 regions such as the Gulf of Mexico. In 2005, hurricanes Katrina and Rita ripped through the Gulf of Mexico, 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. Hurricane season in the Gulf of Mexico is from June 1 to November 30.[19]
After Hurricane Ike in 2008, Diamond's Ocean Tower drilling rig lost its entire drilling package and derrick. The projected cost for the repair of the rig, $2.6 million with accrued salvage costs of $3.7 million, was below the windstorm insurance deductible.[20] In 2008, Diamond's insurance deductible was $75 million per occurrence with an annual deductible of $125 million.[20]
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.[21]
- 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.[22]
- Noble (NE) has a fleet of 56 rigs: 3 drillships, 3 submersibles, 13 semisubmersibles, and 37 jack-ups.[23]
- 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.[24]
| Transocean[25] | Noble[26] | Diamond Offshore Drilling | Rowan Companies[27] | ENSCO International[28] | |
|---|---|---|---|---|---|
| Average Dayrate | $211,900 | $139,948 | N/A | $156,200 | $139,882 |
| Average Fleet Utilization | 90% | 95% | N/A | 94% | 91% |
| Average Number of Rigs | 139 | 62 | 45 | 21 | 46 |
| Total Contract Drilling Backlog | $10,259,000 |
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:
Notes
- ↑ Seeking Alpha: "Diamond Offshore Drilling's Investors Will Be Rewarded for Their Wait"
- ↑ Energy Information Administration: Crude Oil Spot Prices
- ↑ Yahoo Finance: Diamond Offshore Drilling Consolidated Statements of Operations
- ↑ (DO) Form 10-K, Fiscal year 2006, "Delving into the Deep", p.12
- ↑ 5.0 5.1 5.2 Yahoo Finance: Diamond Offshore Drilling Consolidated Statements of Operations
- ↑ Google Finance: DO Income Statement
- ↑ 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
- ↑ Diamond Offshore: Our Fleet
- ↑ 12.0 12.1 Reuters: Diamond Offshore Drilling
- ↑ 13.0 13.1 13.2 13.3 13.4 13.5 Seeking Alpha: Diamond Offshore Drilling Inc. Q2 2009 Earnings Call Transcript
- ↑ Form 10-K, Fiscal year 2008, "Notes to Consolidates Financial Statements", p. 71
- ↑ Form 10-K, FY 2008, Item 6 "Selected Financial Data" p. 23
- ↑ DO 10-K 2008 "Drilling and Other Property and Equipment" p.70</ref
Though Diamond Offshore is partially shielded from the credit crisis, a number of its contracts expire in 2009 (like contracts for Ocean Monarch, Ocean Titan, and Ocean Guardian). The company's ability to favorably renew these contracts or sign new contracts will depend on market conditions.
The economic feasibility of deep water oil exploration is affected by crude oil prices and day rates
Higher oil prices makes it more economically feasible to drill for deposits in deeper and more remote waters. The average drilling rig day rates, which are driven by demand for offshore drilling contracts by oil companies, are between $200,000 to $300,000 for rigs that can operate at water depths of 1500-4000 feet. 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. As of February 2009, DO has ten rigs that can operate at over 4000 feet in water depth and 20 more that can operate at up to 4000 feet in water depth.<ref>[http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzMxNTk0fENoaWxkSUQ9MzEzNzY2fFR5cGU9MQ==&t=1 Diamond Offshore Annual Report FY 2008, "Our Fleet", p.3]</li> <li id="_note-12">[[#_ref-12|↑]] [http://www.bloomberg.com/energy/ Bloomberg Energy Prices]</li> <li id="_note-13">[[#_ref-13|↑]] [http://seekingalpha.com/article/120727-a-tradable-bottom-in-oil Seeking Alpha: "A Tradable Bottom in Oil?"]</li> <li id="_note-14">[[#_ref-14|↑]] [http://geography.about.com/cs/hurricanes/a/hurricane.htm About: Atlantic Hurricane Season]</li> <li id="_note-08">↑ <sup>[[#_ref-08_0|20.0]]</sup> <sup>[[#_ref-08_1|20.1]]</sup> [http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzMxNTk0fENoaWxkSUQ9MzEzNzY2fFR5cGU9MQ==&t=1 Diamond Offshore Drilling 2008 Annual Report, Item 1A: Risk Factors, p. 10]</li> <li id="_note-15">[[#_ref-15|↑]] http://www.deepwater.com/fw/main/default.asp</li> <li id="_note-16">[[#_ref-16|↑]] http://www.enscous.com/default.aspx</li> <li id="_note-17">[[#_ref-17|↑]] http://www.noblecorp.com/about/aboutfrX.html</li> <li id="_note-18">[[#_ref-18|↑]] http://www.prideinternational.com/rigfleet/type.htm</li> <li id="_note-19">[[#_ref-19|↑]] [http://sec.gov/Archives/edgar/data/1083269/000114036108005230/form10-k.htm RIG 2007 10-K]</li> <li id="_note-20">[[#_ref-20|↑]] [http://sec.gov/Archives/edgar/data/1169055/000095012908001375/h54275e10vk.htm#107 NE 2007 10-K]</li> <li id="_note-21">[[#_ref-21|↑]] [http://sec.gov/Archives/edgar/data/85408/000095012908001384/h54254e10vk.htm#125 RDC 2007 10-K]</li> <li id="_note-22">[[#_ref-22|↑]] [http://sec.gov/Archives/edgar/data/314808/000031480808000012/form10k2007.htm ESV 2007 10-K]</li>
<li id="_note-23">[[#_ref-23|↑]] http://www.rigzone.com/data</li></ol></ref>
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