A subsidiary of rig contractor Diamond Offshore Drilling Inc. (DO) has inked a long-term drilling agreement with Anadarko Petroleum Corporation (APC). The deal is expected to generate $1.8 billion in revenues.
Under the contract, Diamond Offshore’s two ultra-deepwater drillships, Ocean BlackHawk and Ocean BlackHornet, are each contracted with Anadarko for five years and set to roll out in late 2013 and early 2014, respectively.
Diamond's drillships are currently under construction in the South Korean yard of Hyundai Heavy Industries and are capable of operating up to 12,000 feet under water.
Additionally, Anadarko and Diamond have mutually dropped all claims related to a charge filed by the former late last year for the cancellation of contract with semi-submersible Ocean Monarch. This was due to the US government's ban on deep-water drilling in the Gulf of Mexico following the Macondo oil spill disaster. Ocean Monarch was contracted with Anadarko at a rate of more than $440,000 a day through mid-March 2013.
Following the lifting of the drill ban in the deepwater Gulf of Mexico, offshore drillers are experiencing improved market conditions with an uptrend in oil prices, better bidding activity as well as the winding down of production in mature oilfields in the North Sea and Mexico. Hence, as a contract drilling company, Diamond is also making constant efforts to take advantage of the scenario.
Houston, Texas-based Diamond Offshore is a major contract driller, providing comprehensive offshore drilling services to the global energy industry. We believe that Diamond Offshore exhibits long-term earnings growth visibility based on its strong leverage to the offshore deepwater drilling market.
Additionally, the company’s significant free cash flow generation potential and healthy balance sheet enhance the possibility of further share buybacks and/or special dividends, going forward.
However, we remain cautious due to a number of headwinds that all offshore drillers face, includingthe lack of pricing power and the widespread effects of the Gulf of Mexico drill ban and related U.S. policies.
Tough competition from its larger peers such as Transocean Ltd. (RIG) and Noble Corporation (NE) is also a concern. Our long-term Neutral recommendation for the stock remains unchanged and the company holds a Zacks #3 Rank (short-term Hold rating).
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