Diamond Offshore Drilling Inc. (DO) has decided to shift a deepwater rig from the Gulf of Mexico (GoM). Diamond is slated to relocate the rig to work for BP Plc (BP) in Vietnam, under a three-month contract recently signed by the two companies.
Diamond’s deepwater rig Ocean Monarch is scheduled to drill two wells for the British oil giant at the rate of $340,000 per day. The rig, capable of drilling up to 10,000 feet of water, is slated to reach Vietnam in November. However, Diamond pointed out that Ocean Monarch will be able to enter into the BP contract only after the closure of its current deal with Marathon Oil Corporation (MRO). The ongoing contract with Marathon has a dayrate of about $290,000 and is valid till mid August.
Ocean Monarch is the third Diamond rig to leave the GoM since the Deepwater Horizon explosion in April last year and the subsequent deepwater drilling ban in U.S. waters. Diamond is not the only driller to leave the GoM. Already 7 of the 30 rigs that were previously functional in the U.S. Gulf have abandoned the region following the blowout incident. However, there still remains some hope for the distraught region with some departed rig planning a comeback.
Ocean Endeavor –– the first rig that Diamond removed from the GoM had already extended its one-year contract period for another eight months with Burullus Gas Co. of Egypt. After Monarch leaves the region, Diamond will have only one deepwater in the nearby waters.
We believe last year’s drilling moratorium and increased regulations will likely have an enduring impact on the company. However, a gradually improving regulatory environment in the GoM is expected to be favorable for Diamond’s domestic fleet performance.
We remain optimistic on Diamond Offshore’s long-term earnings growth visibility based on its strong leverage to the offshore deepwater drilling market. However, we are cautious due to a number of headwinds that all offshore drillers presently face, including the lack of pricing power as well as the lingering effects of the Gulf of Mexico drill ban and related U.S. policies.
Hence, we remain Neutral on the stock. The company currently holds a Zacks #3 Rank, which translates to a short-term Hold rating.
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