Post on 03-Jan-2016
Diamond Offshore Drilling, Inc.April 21, 2009
Alan Lagunov, Pragnesh Podar, Gana Raman, Bilal Rathore
Offshore Drilling
• Diamond Offshore’s job is to drill and complete wells at the direction of customers – Completion in industry terms means preparing the
well for production • Rigs come with a full crew and the equipment
and supplies needed to carry out the assigned task– May range from a few days to multiple years– Crews live on rigs for 14 days, then get 14 days off
Business Description
• Provides contract drilling services to the energy industry globally– Oil and gas
• Leading company in deepwater drilling• One of the world’s largest fleets of offshore
drilling rigs– 30 semisubmersibles– 14 jack-up units– 1 drill ship
Company History• Incorporated in Delaware in 1989• Diamond Offshore is a collection of three
companies– Ocean Drilling and Exploration Co. (ODECO)– Zapata Petroleum Corp.
• Partnership which included George H.W. Bush• Purchased by Artheusa Ltd. in early 1990s
– Diamond M Drilling Co.• After oil collapse of 1980s, Loews bought assets
of Diamond M (1989)
Company History
• In 1992, Diamond M bought out ODECO• In 1993, changed name to Diamond Offshore
Drilling, Inc.• In 1995, Loews sold 30% of the company in an
IPO – Wholly owned subsidiary of Loews prior to that
• In April 1996, acquired Artheusa Ltd.• In February 2009, added to the S&P 500 index
Types of Rigs
• Semisubmersibles (30)– Used in water depths of 1,100 to 10,000 feet– Consist of an upper working and living deck resting on
vertical columns connected to lower hull members approximately 55 feet to 90 feet below the water line
– Typically anchored in position and remain stable for drilling in the semi-submerged floating position due to wave transparency characteristics at the water line
– Three rigs use computer-controlled thruster (dynamic-positioning) system to maintain the rig’s position over a drill site
Types of Rigs
• Jack-up Units (14)– Mobile, self-elevating drilling platform equipped with legs
that are lowered to the ocean floor until a foundation is established to support the drilling platform
– Used in water depths of 20 to 350 feet
• Drill Ship (1)– Self-propelled – Positioned over a drill site through the use of either an
anchoring system or a dynamic-positioning system– Used in water depths of up to 7,500 feet
Worldwide Rig Locations
Total 45 rigsSource: Company Website
Source: Oil Market Report. March 2009
Key Deep Water Areas
Source: Howard Weil Energy Conference. March 2009
Industry Overview
• Profitability depends on technical expertise and efficiency of operation.
• Labor Intensive Industry– Avg. Annual Rev. per Employee = $410,000
• US oil and gas drilling support activities expected to grow at an annual compounded rate of 4% until 2013.
Source: Hoovers Competitive Summary. April 2009
DO & Top Competitors• Diamond Offshore (DO)
– Market Cap: $9.64 Billion– Close (4/20/2009): $69.64
• Transocean (RIG)– Market Cap: $20.49 Billion– Close (4/20/2009): $64.09
• Noble (NE)– Market Cap: $6.68 Billion– Close (4/20/2009): $25.56
• ENSCO (ESV)– Market Cap: $41.90 Billion– Close (4/20/2009): $29.55
Competitors from Hoovers
Comparables
Company Name Exchange:Ticker
Return on
Assets %
Return on
Equity %
Return
on
Capital %
Gross
Margin %
EBITDA
Margin
%
Ensco International Inc. (NYSE:ESV) NYSE:ESV 16.3 27.5 19.5 67.3 66.5 Noble Corp. (NYSE:NE) NYSE:NE 18.1 32.5 20.8 67.1 65.0 Diamond Offshore Drilling Inc. (NYSE:DO) NYSE:DO 25.8 42.1 33.1 64.7 62.1 Transocean Ltd. (NYSE:RIG) NYSE:RIG 10.2 28.9 11.7 57.7 50.7
High 25.8 42.10 33.10 67.30 66.50 Average 17.6 32.75 21.28 64.20 61.08 Median 17.2 30.70 20.15 65.90 63.55 Low 10.2 27.50 11.70 57.70 50.70
Company Name Exchange:Ticker
Total
Enterprise
Value ($mm)
TEV/LTM
Total
Revenues
TEV/LTM
EBITDA P/TangBV
Forward
P/E
Diamond Offshore Drilling Inc. (NYSE:DO) NYSE:DO 9,971.0 2.81 4.53 3.05 6.34 Ensco International Inc. (NYSE:ESV) NYSE:ESV 4,047.1 1.65 2.49 1.05 3.53 Noble Corp. (NYSE:NE) NYSE:NE 7,608.3 2.21 3.4 1.36 3.64 Transocean Ltd. (NYSE:RIG) NYSE:RIG 34,940.3 2.76 5.43 2.64 3.89
High 34,940.3 2.81 5.43 3.05 6.34 Average 14,141.7 2.36 3.96 2.03 4.35 Median 8,789.7 2.49 3.97 2.00 3.77 Low 4,047.1 1.65 2.49 1.05 3.53
Source: Capital IQ
DO & Competitor 5 yr Returns
Source: Google Finance
Floaters After Newbuild Deliveries
Source: Howard Weil Energy Conference. March 2009
Crude Oil vs. DO Stock Price
Source: Howard Weil Energy Conference. March 2009
DO Correlation with Crude Oil Spot
Extremely High Correlation!
R2 = 0.9347 Source: Bloomberg. April 2009
DO Correlation with Rig Count
Extremely High Correlation!
R2 = 0.8244 Source: Bloomberg. April 2009
Oil Cost Curve
Competitive Correlation
Competitor Dividends
Source: Howard Weil Energy Conference. March 2009
Return on Capital Employed (From Credit Suisse)
Source: Howard Weil Energy Conference. March 2009
Strengths & Weaknesses
• Strengths– Leading player in deepwater drilling– Recently finished upgrading three rigs in 2008
• Increases efficiency and marketability– Conservative capital structure increases survivability in tough
times
• Weaknesses– Cyclical industry with intense price competition– Heavily rely on a limited number of customers
• Top 5 customers accounted for 40% of revenues– Contracts do not adjust for increases in operating costs
Opportunities & Threats
• Opportunities– Capitalize on foreseeable growth in emerging markets– Profit from the decline in mature onshore oil fields
which require offshore exploration.• Threats
– Worldwide demand for oil– The ability of the Organization of Petroleum Exporting
Countries (OPEC) to control production levels and pricing.
– Public Health for employees
Office Locations• Headquarters in Houston, Texas• Regional offices in Louisiana, Australia, Brazil,
Indonesia, Scotland, Singapore and The Netherlands
Source: Company Website
Ownership
• 50.4% owned by Loews Corporation(NYSE:L), a diversified holding company– Three officers from Loews serve on Diamond
Offshore’s Board of Directors
• 94.83% owned by institutions
Key Management Executives• James S. Tisch, Chairman of the
Board and Director– Served as CEO until 2008 and a former
CEO at Loews (parent company)
• Lawrence R. Dickerson, CEO, President and Director– Served in the United States Commission
on Ocean Policy from 2001-2004
• Gary T. Krenek, CFO and Senior VP– Served as CFO since 2006
Valuation
• DCF : $63/share• Triangulation: $60/share
– 10% to Comp’s P/E ratio– 90% to DCF
Recommendation
• Write 1 Sept. 2009 80 strike Call Contract • Purchase 1 Sept. 2009 60 strike Put Contract • Execute Flat, or with slight credit to account• Why?
– Protection from market volatility during the summer.
– Capitalize on potentially sharp price moves during the summer.
– Protect downside with a net cash inflow.– Allows exit at a good price.