Diamond Offshore Drilling Inc. (DO) has awarded Hyundai Heavy Industries Co. Ltd. the construction contract for its fourth ultra-deepwater drillship – Ocean BlackLion − for a total cost of $655 million.
This new unit will be equipped with dynamic-positioning, dual activity capability, a maximum hook-load capacity of 1,250 tons capable of working at a depth of up to 12,000 feet under water. However, the drillship is expected to operate at approximately 10,000 feet under water initially and is due for delivery by the fourth quarter of 2014. Diamond believes that this new unit will be valuably utilized in the ultra-deepwater markets.
The offshore drilling company also ordered for two seven-ram blowout preventer (BOP) stacks for the newest rig and an additional seven-ram BOP for its rigs currently under construction. This addition of a second BOP for its units will cost approximately $34 million and will bring the average cost to about $640 million for each of the previously announced drillships.
Again, in two distinct deals, the company wrapped up the sale of its four jackup rigs to mainly focus on its floater business. Diamond offloaded its Ocean Heritage for $45 million in cash, while Ocean Champion, Ocean Crusader, and Ocean Drake pulled out $10 million in cash together.
Houston, Texas-based Diamond is a major contract driller, providing comprehensive offshore drilling services to the global energy industry. The company exhibits long-term earnings growth visibility based on its strong leverage to the offshore deepwater drilling market. It also aims to enhance its footprint in emerging markets (like Brazil and West Africa) to reap benefits from the recently discovered deepwater fields there.
During the first quarter of 2012, the company’s Brazilian backlog saw solid growth with extensions on Ocean Valient at increased dayrates. 15 more rigs are already working for Petroleo Brasileiro S.A. (PBR or Petrobras). These are expected to boost revenues significantly for Diamond given the surge in demand in Brazil and the inability of the region to develop a local offshore rig construction industry.
However, we remain on the sidelines at this stage, given the volatile oil and gas price scenario, geopolitical risks related to international operations, as well as the uneven mid-water markets and expectations of a gradual decline in mid-water rates.
Our long-term Neutral recommendation remains unchanged for Diamond, which retains a Zacks #3 Rank (short-term Hold rating).
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