Real Client Managed Portfolio
Diamond Offshore (DO)
October 25, 2012
Presented By:
Eric Hoffman
Patrick O’Donnell
Xiaohua (Leah) Xu
Agenda
• Diamond Offshore in the Portfolio
• Macro-Economic Review
• Stock Market Prospects
• Diamond Offshore (the Business)
• Financial Analysis
• Financial Projections
• Application of Financial Tools
• Recommendation
Diamond Offshore In the Portfolio
February 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 $4,665
November 2010
•
Purchased 100 shares @ $68.10
As of October 24, 2012
•
Diamond offshore price: 69.52
•
Currently have 150 shares with unrealized loss of -.2%
•
Currently represents 3 % of the total portfolio (7.6 of portfolio equity holdings)
The Company
• The company originally started as Diamond M Drilling company.
In 1980, Loews Corp bought the distressed company’s assets.
The company was renamed to Diamond offshore and held
private until 1995.
• Currently one of the largest off-shore drilling corporations
• Headquartered in Huston, TX – Global presence (primarily in
South America, Middle East, Africa, Asia and Pacific Asia)
• 98% owned by 447 institutional and Mutual fund shareholders
• 50.4% Owned by Loews Corporation (Jim Tisch).
Macro Economic Review
• The primary driver of the drilling market is
energy consumption.
– Easier for DO to earn contracts
– Determines capacity/daily use rates of rigs
– Greater demand for product naturally shifts
power from buyer to supplier.
Source: U.S. Energy Information Administration, International Energy Outlook 2011
:
Source: U.S. Energy Information Administration, International Energy Outlook 2011
Company Overview
• Leading global offshore oil and gas drilling contractor
• Customer Base
• major independent oil and gas companies
• government-owned oil companies
• Capacity: 44 offshore rigs as June 30, 2012
• 32 semisubmersibles
• 7 jack-ups
• 5 dynamically positioned drillships
• 4 of them are under construction: delivery expected in second and fourth
quarters of 2013 and the remaining two in the second quarter of 2014
Source: Form 10Q,Diamond offshore, FY 2012
The fleet
Source: Form 10k,Diamond offshore, FY 2011
Stock performance
BP oil spill in the Gulf of Mexico
Source: Yahoo Finance, dates from 1/1/08 – 10/24/12
Competitors
• Transocean (RIG): 9 Billion sales
• Noble Corporation (NE): 3 Billion sales
• Ensco PLC (ESV): 4 Billion sales
Source: Yahoo Finance, dates from 1/1/08 – 10/24/12
Business Strategy
• Cost Leadership
– Reduced Equipment downtime
– Safety
• Upgrade fleet to meet customer demand for advanced efficient
and high-tech rigs
– Acquire or build new rigs at attractive price
– Enhance the capabilities of existing rigs at a lower cost and reduced
construction period
• Take advantage of industry cyclicality to make opportune
investments at times of distress or when others are unwilling or
unable to invest
– 2009: acquired two new-build ultra-deepwater, dynamically positioned
semisubmersible drilling rigs
– 2010: entered into three separate turnkey contract with Hyundai for three
ultra-deepwater drillships
– 2012: announced the construction of a moored semisubmersible drilling rigs
that will be designed to operated in water depth up to 6,000 feet
Source: Form 10-K,Diamond offshore, FY 2011
Business Model
Obtain contract through competitive
bidding processes / Direct negotiation
Type of Contract
• Exploratory: to find new oil or gas deposits
• Development: to prepare the discovery for
production
Duration of Contract
• Well-to-well contract
• Term Contract: fixed period of time
Revenue
• Majority: fixed dayrate
• Incentive bonus based upon performance
Revenue Drivers
• Day Rates
– Ultra-deepwater and deepwater: strong
• successful exploration and development programs
offshore Brazil and West Africa
– mid-water floater: stable
– Jack-up: Decline
• Utilization Rate:
– the actual percentage of time in a year a rig would be
utilized
Revenue Drivers
Day Rates
Utilization Rate
Source: DO 10K and 10 Q 2005- 2011
Financial Analysis
• So…How does this company make money?
• Jack ups (10 – 350 Ft)
• Intermediate Submersibles (4000 ft)
• Deep-water Drillships/Submersibles (greater than 4000 ft)
The Fleet
The Contracts
The Estimates
• See Excel “Estimate”
So where is the revenue coming from?
• Customers: DO’s five largest customers in the aggregate
accounted for 62% of our consolidated revenues primarily lead
by Petrobras and OGX (who accounted for approximately 35%
and 14% of DO’s consolidated revenues in 2011).
• Location:
– 40% North America
– 20% South America
– 20% Africa/ Europe/Mediterranean
– 20% Asia/Pacific Asia
So where is the revenue leaving?
• Depreciation
• Bad Debt Expense
• Impairment
• Sell for Loss Transactions
• Foreign Exchange
Multiples Valuation
Multiples Valuation
DuPont Breakdown
Historical Returns
WACC Analysis
DCF Analysis
Recommendation: Hold
• Current Stock Price:$69.52
• DCF Valuation:$67.79
• Comparable Companies Valuation:$67.06
• Recommendation: Hold 150 shares