Diamond Offshore Drilling Inc.Raj Dhawle
Pratik KamdarJinglin Pan
http://www.diamondoffshore.com/ourCompany/ourcompany_rigamarole.php
AgendaCompany OverviewMacro-EconomicIndustry Overview
Porter’s Five ForcesCompetitorsCompany Performance
SWOT Analysis Valuation Recommendation
Holdings HistoryFebruary 2008
• Purchased 100 shares @ $122.90 for a total cost of $12,290• Give portfolio exposure to oil and drilling sector
November 2008• Purchased 50 shares @ $72.96 for a total cost of $3,648
September 2009• Written call option exercised, sold 100 shares at adjusted
price of $76.25 totaling $7,625 • Strike price adjusted to $76.25 from original strike price of
$80.00 due to a special cash dividend of $1.875 paid twice over the holding period of the option
• Realized loss of $4,665November 2010
• Purchased 100 shares @ $68.10As of 02/28/2011
• Diamond offshore closed @ $78.23• Currently have 150 shares with unrealized gain of 12.20%• Currently represents 3.45 % of the portfolio by holding value
Company Overview
• Among the largest deepwater drilling contractors• Provides drilling services to large Oil and Gas companies• Operates one of the largest fleets of deepwater drilling rigs • Key Facts:
• Headquartered in Huston, TX• Currently employs 5300 people• Stoke trades under ticker symbol ‘DO’• Current Price: $78.23• Market Capitalization (as on 02/28/2011) : 10.88 B • Area of Presence: USA, Australia, South America, Middle
East, Asia, Africa
Source: www.finance.yahoo.com/www.diamondoffshore.com
Nature of Operation
Key Revenue Drivers:
Day Rates:The rate that driller charges an operator for each day over contract period for the use of rigs
Utilization Rate:The actual percentage of time in a year a rig would be utilized
• Both variables mentioned above depend on exploration expenditures set by oil and gas companies which in turn depend on Political, Regulatory and Economic factors
• Availability of rigs in an area of potential exploration also affects day rates and utilization rates
Peer Group Stock Movements
Source: Google Finance
DO current stock price: $78.28
Energy Outlooks
Short Term OutlookAverage $93 per barrel in 2011Average $98 per barrel in 2012World real GDP grows at 3.9% and 4.0%
respectively
Spot Prices(Crude Oil in Dollars per Barrel, Products in Dollars per Gallon)
2/15/2011 2/16/2011 2/17/2011 2/18/2011 2/22/2011 2/23/201183.13 83.8 85.05 85.03 92.65 96.04
Source: EIA
Energy Outlook
Long Term OutlookTotal energy demand in non-OECD countries increases by 84%
vs 14% in OECD countries between 2007 and 2035Core growth in non-OECD: Brazil, China, Middle East
Industrials sectors such as:manufacturing, mining, construction, agriculture
Source: International Energy Outlook 2010, Highlightshttp://www.eia.doe.gov/oiaf/ieo/pdf/highlights.pdf
Source: http://www.mcclatchydc.com/2010/05/07/93754/gulf-spill-reminds-america-the.html
The End of ‘Easy Oil’
Exploratory efforts across the globeDetected hydrocarbons off the shores of
Sarawak, Western Australia, Vietnam, Bahamas, Congo etc
Future giant oil fields projected to be in Middle East Iraq (relatively undeveloped fields)
contracts with Exxon, Shell, BP, China National Petroleum to develop its oil fields.
Source: Financial News for Major Energy Producers, Third Quarter 2010, Page 5 http://www.eia.gov/emeu/perfpro/news_m/q310.pdf
Industry Outlook
Oil and gas exploration industry grew at a healthy rate from 2005-2007.
The global economic crisis has led to rapid fall of prices in 2009.
Sector production volumes increased with a compound annual growth rate (CAGR) of 1.2% between 2005 and 2009 and hence reach a total of 49.8 billion barrels in 2009.
Source: Marketline Databasehttp://library.marketlineinfo.com/library/DisplayContent.aspx?Ntt=oil+and+gas+exploration&Ntx=mode%2bmatchall&Nty=1&D=oil+and+gas+exploration&Ntk=All&Ns=
Future Growth
Source: Marketline Databasehttp://library.marketlineinfo.com/library/DisplayContent.aspx?Ntt=oil+and+gas+exploration&Ntx=mode%2bmatchall&Nty=1&D=oil+and+gas+exploration&Ntk=All&Ns=
Sector Value Forecast
Source: Marketline Databasehttp://library.marketlineinfo.com/library/DisplayContent.aspx?Ntt=oil+and+gas+exploration&Ntx=mode%2bmatchall&Nty=1&D=oil+and+gas+exploration&Ntk=All&Ns=
Porters Five force ModelThreat of New Entrants (Low): The oil drilling industry is highly capital extensive. The cost of equipment is high and the skilled labor is also very expensive. Due to high capital and very specific technical knowhow that is required in this industry. It makes the threat of new entrants very low.
Power of Suppliers (Medium): The rig builders have more bargaining power is directly dependant on the demand for oil. If the demand for oil and hence the rigs is high, it makes the power of suppliers high. If the demand is low than it gives the drillers a better bargaining power.
Power of Buyers (High): Buyers set out tenders and the bidder who bids with the lowest wins. The oil industry is going to grow in the future. However, there is going to be an oversupply of rigs as the number of rigs is likely to increase to 811. Around 45% of them are still without contract. This gives the buyers high bargaining power and may drag the day rates down.
Threat of Substitutes (Low): There are many alternatives to oil and natural gas including coal, solar, and wind power. Coal is already well established in the market place while other alternative technologies are still far too inefficient to compete over the next decade.
Industry Rivalry (High): There are high exit barriers due to the costs of the rigs and the lack of alternative uses for them. Therefore, companies want to stay in the industry, increasing rivalry. Bids to get contracts is very competitive and lowest cost wins the bid.
Competitors Analysis Types of Rigs
Source:http://www.noblecorp.com/Fleet/FleetOverview.asphttp://www.enscous.com/Rig-Fleet/default.aspxhttp://www.diamondoffshore.com/ourFleet/ourfleet.phphttp://www.deepwater.com/fw/main/Our-Rigs-14.html
Competitors Analysis
Source:http://library.marketlineinfo.com.proxy2.library.illinois.edu/library/DisplayContent.aspx?Ntt=diamond+offshore&Ntx=mode%2bmatchall&Nty=1&D=diamond+offshore&Ntk=All&Ns=
Average Daily Rates
http://library.marketlineinfo.com.proxy2.library.illinois.edu/library/DisplayContent.aspx?Ntt=diamond+offshore&Ntx=mode%2bmatchall&Nty=1&D=diamond+offshore&Ntk=All&Ns=
Average Utilization Rates
http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=113031&fid=7409300http://www.diamondoffshore.com/investors/investors_secfiling.phphttp://esv.ir.edgar-online.com/fetchFilingFrameset.aspx?FilingID=7749323&Type=HTMLhttp://phx.corporate-ir.net/phoenix.zhtml?c=98046&p=IROL-secToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDA5NTAxMjMtMTEtMDE4NjA3L3RvYy9wYWdl&ListAll=1&sXBRL=1
Transocean Forecasted Daily Rates
Transocean ($000)
Average Day rates 2010 2011 2012 2013 2014 2015
High Specification Rigs 448 479 482 480 441 465Intermediate specification Rigs 344 366 338 261 265 337High Specification Jack ups 166 162 185 185 180 168
Standard Jack Up 141 128 109 84 78 130
http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=113031&fid=7409300http://www.diamondoffshore.com/investors/investors_secfiling.phphttp://esv.ir.edgar-online.com/fetchFilingFrameset.aspx?FilingID=7749323&Type=HTMLhttp://phx.corporate-ir.net/phoenix.zhtml?c=98046&p=IROL-secToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDA5NTAxMjMtMTEtMDE4NjA3L3RvYy9wYWdl&ListAll=1&sXBRL=1
Key RatiosRatios Diamond
OffshoreTransocean Noble
CorporationEnsco
Debt/Equity 0.41 0.48 0.11 0.05
Operating Margin
52.41 38.08 55.23 48.85
ROE 39.44 17.16 27.79 15.32
ROA 24.57 8.88 21.66 12.39
Capex as % of sales
11.36 26.41 21.37 44.26
Source: http://finance.yahoo.com
Stock PerformanceStock appreciated almost 43% after bottoming out in June 2010
Source: http://finance.yahoo.com
History
In the Oil Crisis of 1980, Jim Tisch of Loews Corp bought out all drilling assets of Diamond M Drilling Co. owned by Kaneb Services Inc. at substantially distressed prices
In 1992, Diamond M Drilling Co. under the ownership of Loews purchased all outstanding stock of Ocean Drilling and Exploration Co. , through which it acquired 39 rigs which still remain with DO’s fleet today
In 1993, Loews renamed Diamond M Drilling Co. as Diamond Offshore Drilling Inc.
Loews Corp took the company public in 1995 by selling 30% stake in an IPO
Jim Tisch of Loews Corp still holds 51 % stake in the company
Nature of OperationsOil and Gas companies carry out geological
surveys and based on that give a drilling contract to a driller on designated area.
Drilling company performs following operations:Exploratory Drilling: Drill a new well for
explorationDevelopment Drilling: Dig new wells in
areas of successful exploration and complete wells for continued hydrocarbon extraction by operators
The FleetDifferent types of rigs/equipments:High Specification Floaters(Submersibles &
Drillships):Capable of working in water depths of 4000
feet or greater and harsh environment Intermediate Submersibles:Capable of working in maximum water depths
of 4000 feetJack-ups:Capable of working in water depths of 20 feet
to 350 feet
Rig Locations GOM Mexico
Australia/Asia/Middle
East
Europe/Africa/
Mediterranean
South America
High Specification Floaters 2* 0 3 2 7
Intermediate Submersibles 3** 4*** 3 9
Jack-ups 6**** 2 3 1 1
Rig Locations and Revenue Drivers
*1 out of 2 contracted floaters received a notice for the termination of contract by an operator**2 out of 3 intermediate semis in GOM are cold staked ***1 intermediate semi is cold staked in Malaysia ****4 out of 6 Jack-ups in GOM are cold staked
Type of Rig No's
Avg Utilization
RateAvg Day
RateAvg % of Total
Revenue
High Specification Floaters 14 72% 356,000 40%Intermediate Submersibles 19 82% 249,200 48%
Jack-ups 13 72% 112,000 12%
Breakdown of Revenues By Geographic Region
Region 2010 2009 2008United States/GOM 19% 34% 41%South America 39% 20% 16%Australia/Asia/Middle East 19% 20% 16%
Europe/Africa/Mediterranean 18% 18% 18%Mexico 4% 9% 9%
By Rig Category
Type of Rig 2010 2009 2008
High Specification Floaters 44% 39% 38%
Intermediate Submersibles 48% 48% 47%
Jack-ups 8% 13% 15%
Total Revenues 3,229,517 3,536,579 3,476,417
•Revenue in GOM has decreased due to moratorium on drilling activity in GOM after Macondo Incident•Diversification strategy is paying off as revenues from international regions have been increasing
•Approx 85 % Revenues come from high specification floaters and intermediate submersibles
SWOT AnalysisStrengths Weaknesses Strong Fleet Strong International
Presence Strong Contact Revenue
Backlog
Increase in Long Term Debt Concentrated Customer
Base Significant no. of old rigs
compared to competitors Increase in insurance cost
Opportunities Threats Positive Outlook for Oil and
Gas Sector Increase in Demand for
Natural Gas and Liquid Fuels in US
Tough Competition Increasing Environmental
Regulations Operational Risk
ROE Breakdown
Base Case Revenue
Discount Rate 22.6%
Discount Rate (Terminal Adjusted)12.4%Terminal Growth Rate 4.0%
ValuationPresent Value of FCF's 11,780.3
Less: Outstanding Debt 1,495.6
Plus: Cash and ST investments 404.4
Outstanding Shares 139.0 Million
Value per Share $76.89
Other Scenarios
Positive: Anticipation of utilization rates in the 80s% with slightly higher day ratesOn average, revenues are higher by 9%Fair Value Estimate: $91.90
Negative: Oversupply leads to lower utilization rates and lower day rates.On average, revenues are lower by 10%Fair Value Estimate: $61.66
Multiples Valuation
Forward P/E 33% 66.85
Price/Sales 33% 86.87
TEV/EBITDA 33% 100.61
Estimated Value $84.78
Recommendation
To place a limit sell order@$80.00. (for 50 shares purchased in Nov 2008 @ $72.96)
Long Term Capital Gain of: $352 (4.82%)