On Mar 22, 2016, we issued an updated research report on Texas-based major contract driller Diamond Offshore Drilling Inc. DO.
We believe that Diamond Offshore Drilling has solid fundamentals with significant free cash flow potential and a clean balance sheet. This enhances the possibility of further share buybacks by the company in the years ahead.
The driller’s prospects seem to be improving if we consider oil’s continued rise following the Fed’s decision to keep interest rates unchanged and projection of a lesser number of rate hikes this year. Also U.S. Energy Department's latest inventory release showed a lower-than-expected rise in crude inventories. Things were further helped by Qatari oil minister Mohammed Bin Saleh Al-Sada’s statement that the major oil producers will be meeting in Doha on April 17 to discuss production freeze.
In such a scenario, the company aims to increase its footprint in emerging markets to reap benefits from the discoveries of deepwater fields. Also, gradual improvement in the Gulf of Mexico drilling market (especially after the deepwater drilling ban was lifted), along with better bidding activity, will prove beneficial for the contract driller.
Diamond Offshore Drilling remains in good financial health and has a track of disciplined capital outlays and financial conservatism. As of Dec 31, 2015, Diamond Offshore had approximately $119.0 million in cash and cash equivalents, while long-term debt of $1,994.7 million.
However, during the fourth quarter of 2015, Diamond Offshore Drilling’s revenues declined year over year. The deterioration was mainly attributable to lesser revenues from the contract drilling segment and lower utilization of ultra deepwater floaters and jackup rigs. Any delay or inability to manage these matters in time as well as failure to handle the repositioning of rigs will hurt the company’s profitability.
Moreover, higher rig availability is a major concern in 2016 as the global floater market is likely to be under considerable pressure in the intermediate term. As a result, the major operators are reducing spending extensively, postponing projects and reviewing their cost structure.
Zacks Rank and Other Stocks
Diamond Offshore Drilling carries a Zacks Rank #2 (Buy). Other favorably placed players from the energy sector are SolarEdge Technologies, Inc. SEDG, Braskem S.A. BAK and Enviva Partners, LP EVA. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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