Diamond Offshore Drilling Inc.
Raj Dhawle
Pratik Kamdar
Jinglin Pan
http://www.diamondoffshore.com/ourCompany/ourcompany_rigamarole.php
Agenda
Company Overview
Macro-Economic
Industry Overview
Porter’s Five Forces
Competitors
Company Performance
SWOT Analysis
Valuation
Recommendation
Holdings History
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 02/28/2011
• Diamond offshore closed @ $78.23
• Currently have 150 shares with unrealized gain of 12.20%
• Currently represents 3.45 % of the portfolio by holding value
Company Overview
•
•
•
•
Among the largest deepwater drilling contractors
Provides drilling services to large Oil and Gas companies
Operates one of the largest fleets of deepwater drilling rigs
Key Facts:
• Headquartered in Huston, TX
• Currently employs 5300 people
• Stoke trades under ticker symbol ‘DO’
• Current Price: $78.23
• Market Capitalization (as on 02/28/2011) : 10.88 B
• Area of Presence: USA, Australia, South America, Middle
East, Asia, Africa
Source: www.finance.yahoo.com/www.diamondoffshore.com
Nature of Operation
.
The contract for
drilling is given
to the drilling
company for
drilling a new
well at
designated area
The crude oil and
natural gas are
transported to
the refineries of
Oil and Gas
Companies for
refinement
After refinement
it is distributed
downstream
through different
distribution
chains
Key Revenue Drivers:
Day Rates:
The rate that driller charges an operator for each day over
contract period for the use of rigs
Utilization Rate:
The actual percentage of time in a year a rig would be
utilized
• Both variables mentioned above depend on exploration
expenditures set by oil and gas companies which in turn
depend on Political, Regulatory and Economic factors
• Availability of rigs in an area of potential exploration also
affects day rates and utilization rates
Peer Group Stock Movements
DO current stock price: $78.28
Source: Google Finance
Energy Outlooks
Short Term Outlook
Average $93 per barrel in 2011
Average $98 per barrel in 2012
World real GDP grows at 3.9% and 4.0%
respectively
Spot Prices
(Crude Oil in Dollars per Barrel, Products in Dollars per Gallon)
2/15/2011 2/16/2011 2/17/2011 2/18/2011 2/22/2011 2/23/2011
83.13
83.8
85.05
85.03
92.65
96.04
Source: EIA
Energy Outlook
Long Term Outlook
Total energy demand in non-OECD countries increases by 84%
vs 14% in OECD countries between 2007 and 2035
Core growth in non-OECD:
Brazil, China, Middle East
Industrials sectors such as:
manufacturing, mining,
construction, agriculture
Source: International Energy Outlook 2010, Highlights
http://www.eia.doe.gov/oiaf/ieo/pdf/highlights.pdf
Source: http://www.mcclatchydc.com/2010/05/07/93754/gulf-spill-reminds-america-the.html
The End of ‘Easy Oil’
Exploratory efforts across the globe
Detected hydrocarbons off the shores of
Sarawak, Western Australia, Vietnam,
Bahamas, Congo etc
Future giant oil fields projected to be
in Middle East
Iraq (relatively undeveloped fields)
contracts with Exxon, Shell, BP, China
National Petroleum to develop its oil fields.
Source: Financial News for Major Energy Producers, Third Quarter 2010, Page 5
http://www.eia.gov/emeu/perfpro/news_m/q310.pdf
Industry Outlook
Oil and gas exploration industry grew
at a healthy rate from 2005-2007.
The global economic crisis has led to
rapid fall of prices in 2009.
Sector production volumes increased
with a compound annual growth rate
(CAGR) of 1.2% between 2005 and
2009 and hence reach a total of 49.8
billion barrels in 2009.
Source: Marketline Database
http://library.marketlineinfo.com/library/DisplayContent.aspx?Ntt=oil+and+gas+exploration&Ntx=mode%2bmatc
hall&Nty=1&D=oil+and+gas+exploration&Ntk=All&Ns=
Future Growth
Source: Marketline Database
http://library.marketlineinfo.com/library/DisplayContent.aspx?Ntt=oil+and+gas+exploration&Ntx=mode%2bmatchall&Nty=1&D
=oil+and+gas+exploration&Ntk=All&Ns=
Sector Value Forecast
Source: Marketline Database
http://library.marketlineinfo.com/library/DisplayContent.aspx?Ntt=oil+and+gas+exploration&Ntx=mode%2bmatchall&Nty=
1&D=oil+and+gas+exploration&Ntk=All&Ns=
Porters Five force Model
Threat of New Entrants (Low): The oil drilling industry is highly capital extensive.
The cost of equipment is high and the skilled labor is also very expensive. Due to
high capital and very specific technical knowhow that is required in this industry. It
makes the threat of new entrants very low.
Power of Suppliers (Medium): The rig builders have more bargaining power is
directly dependant on the demand for oil. If the demand for oil and hence the rigs is
high, it makes the power of suppliers high. If the demand is low than it gives the
drillers a better bargaining power.
Power of Buyers (High): Buyers set out tenders and the bidder who bids with the
lowest wins. The oil industry is going to grow in the future. However, there is going
to be an oversupply of rigs as the number of rigs is likely to increase to 811. Around
45% of them are still without contract. This gives the buyers high bargaining power
and may drag the day rates down.
Threat of Substitutes (Low): There are many alternatives to oil and natural gas
including coal, solar, and wind power. Coal is already well established in the market
place while other alternative technologies are still far too inefficient to compete over
the next decade.
Industry Rivalry (High): There are high exit barriers due to the costs of the rigs
and the lack of alternative uses for them. Therefore, companies want to stay in the
industry, increasing rivalry. Bids to get contracts is very competitive and lowest cost
wins the bid.
Competitors Analysis
Types of Rigs
Diamond
Offshore
Noble
Transocean Corp
Ensco
High Specification
Rigs
14
47
4
8
Intermediate
Specification Rigs or
midwater floaters
19
26
15
0
Jack ups
13
65
50
41
Total
46
138
69
49
Source:
http://www.noblecorp.com/Fleet/FleetOverview.asp
http://www.enscous.com/Rig-Fleet/default.aspx
http://www.diamondoffshore.com/ourFleet/ourfleet.php
http://www.deepwater.com/fw/main/Our-Rigs-14.html
Competitors Analysis
Revenue by Region
Middle
Europe/Africa/ East/Asia/
Mediterranean Australia
Company
North
South
America America
Diamond
Offshore
42.80% 19.70%
17.70%
19.80%
Transocea
n
19.40%
13.50%
9.40%
57.70%
Ensco
19.80%
19.50%
10.40%
50.30%
Noble
Corp
46.40% 10.20%
19.20%
22.60%
Other Countries
Source:
http://library.marketlineinfo.com.proxy2.library.illinois.edu/library/DisplayContent.aspx?Ntt=diamond+offshore&Ntx=mode%2b
matchall&Nty=1&D=diamond+offshore&Ntk=All&Ns=
Average Daily Rates
(All rates in Diamond
$000’)
Offshore
High
Specification
Rigs
Intermediat
e
Specification
Rigs or
midwater
floaters
Jack ups
Transocean
Noble Corp
2010 2009 2010
Ensco
2010
2009
2009 2010
2009
356
390
466
410
256
254
375
425
249
280
318
335
288
368
0
0
102
128
92
162
96.9
147
109
120
http://library.marketlineinfo.com.proxy2.library.illinois.edu/library/DisplayContent.aspx?Ntt=diamond+offshore&Ntx=mode%2bmatchall
&Nty=1&D=diamond+offshore&Ntk=All&Ns=
Average Utilization Rates
Diamond
Offshore
High
Specification
Rigs
Transocean Noble Corp Ensco
2010
2009 2010 2009 2010 2009
2010
2009
73%
81% 71%
86% 89% 91%
81%
85%
100
%
0
0
77%
75%
Intermediate
Specification
Rigs or
midwater
floaters
73%
89% 68%
69% 86%
Jack ups
61%
72% 41%
55% 79% 82%
http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=113031&fid=7409300
http://www.diamondoffshore.com/investors/investors_secfiling.php
http://esv.ir.edgar-online.com/fetchFilingFrameset.aspx?FilingID=7749323&Type=HTML
http://phx.corporate-ir.net/phoenix.zhtml?c=98046&p=IROLsecToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDA5NTAxMjMtMTEtMDE4NjA3L3RvYy9wYWdl
&ListAll=1&sXBRL=1
Transocean Forecasted Daily
Rates
Transocean ($000)
Average Day rates
2010 2011 2012 2013 2014
2015
High Specification Rigs
Intermediate specification
Rigs
448
479
482
480
441
465
344
366
338
261
265
337
High Specification Jack ups
166
162
185
185 180
Standard Jack Up
141
128
109
84
78
168
130
http://services.corporate-ir.net/SEC.Enhanced/SecCapsule.aspx?c=113031&fid=7409300
http://www.diamondoffshore.com/investors/investors_secfiling.php
http://esv.ir.edgar-online.com/fetchFilingFrameset.aspx?FilingID=7749323&Type=HTML
http://phx.corporate-ir.net/phoenix.zhtml?c=98046&p=IROLsecToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDA5NTAxMjMtMTEtMDE4NjA3L3RvYy9wYWdl&ListAll=1&sXB
RL=1
Key Ratios
Ratios
Diamond
Offshore
Transocean
Noble
Ensco
Corporation
Debt/Equity
0.41
0.48
0.11
0.05
Operating
Margin
ROE
52.41
38.08
55.23
48.85
39.44
17.16
27.79
15.32
ROA
24.57
8.88
21.66
12.39
Capex as % of
sales
11.36
26.41
21.37
44.26
Source: http://finance.yahoo.com
Stock Performance
Stock appreciated almost 43% after bottoming out in June 2010
Source: http://finance.yahoo.com
History
 In the Oil Crisis of 1980, Jim Tisch of Loews Corp bought
out all drilling assets of Diamond M Drilling Co. owned by
Kaneb Services Inc. at substantially distressed prices
 In 1992, Diamond M Drilling Co. under the ownership of
Loews purchased all outstanding stock of Ocean Drilling
and Exploration Co. , through which it acquired 39 rigs
which still remain with DO’s fleet today
 In 1993, Loews renamed Diamond M Drilling Co. as
Diamond Offshore Drilling Inc.
 Loews Corp took the company public in 1995 by selling
30% stake in an IPO
 Jim Tisch of Loews Corp still holds 51 % stake in the
company
Nature of Operations
Oil and Gas companies carry out geological
surveys and based on that give a drilling
contract to a driller on designated area.
Drilling company performs following
operations:
Exploratory Drilling: Drill a new well for
exploration
Development Drilling: Dig new wells in
areas of successful exploration and
complete wells for continued hydrocarbon
extraction by operators
The Fleet
Different types of rigs/equipments:
High Specification Floaters(Submersibles &
Drillships):
 Capable of working in water depths of 4000
feet or greater and harsh environment
Intermediate Submersibles:
 Capable of working in maximum water depths
of 4000 feet
Jack-ups:
 Capable of working in water depths of 20 feet
to 350 feet
Rig Locations and Revenue Drivers
Rig Locations
High Specification
Floaters
Intermediate
Submersibles
Jack-ups
GOM
Australia/As Europe/Afric
ia/Middle a/Mediterra South
Mexico
East
nean
America
2*
3**
6****
0
3
2
7
2
4***
3
3
1
9
1
*1 out of 2 contracted floaters received a notice for the termination of contract by an operator
**2 out of 3 intermediate semis in GOM are cold staked
***1 intermediate semi is cold staked in Malaysia
****4 out of 6 Jack-ups in GOM are cold staked
Type of Rig
No's
Avg
Utilization
Rate
High Specification Floaters
14
72%
356,000
40%
Intermediate Submersibles
19
82%
249,200
48%
Jack-ups
13
72%
112,000
12%
Avg Day
Rate
Avg % of Total
Revenue
Breakdown of Revenues
Region
United States/GOM
South America
Australia/Asia/Middle East
Europe/Africa/Mediterranean
Mexico
By Geographic Region
2010
19%
39%
19%
18%
4%
2009
34%
20%
20%
2008
41%
16%
16%
18%
9%
18%
9%
•Revenue in GOM has decreased due to moratorium on drilling activity in GOM after Macondo
Incident
•Diversification strategy is paying off as revenues from international regions have been increasing
By Rig Category
Type of Rig
2010
2009
2008
High Specification Floaters
44%
39%
38%
Intermediate Submersibles
48%
48%
47%
8%
13%
15%
3,229,517
3,536,579
3,476,417
Jack-ups
Total Revenues
•Approx 85 % Revenues come from high specification floaters and intermediate submersibles
SWOT Analysis
Strengths
 Strong Fleet
 Strong International
Presence
 Strong Contact Revenue
Backlog
Weaknesses
 Increase in Long Term Debt
 Concentrated Customer
Base
 Significant no. of old rigs
compared to competitors
 Increase in insurance cost
Opportunities
 Positive Outlook for Oil and
Gas Sector
 Increase in Demand for
Natural Gas and Liquid
Fuels in US
Threats
 Tough Competition
 Increasing Environmental
Regulations
 Operational Risk
ROE Breakdown
DuPont Breakdown 2005-2010
250%
200%
EBIT Margin
150%
Asset Turnover
Leverage Ratio
Interest Burden
100%
Tax Burden
ROE
50%
0%
2004
2005
2006
2007
2008
2009
2010
2011
Base Case Revenue
Base-Case Scenario: Utilization Rates at
Historical Rates
Revenues (in
3312.75 3986.94 4153.98 4215.53 3963.15 3812.33 3666.56
millions):
8
6
1
1
5
7
4
Utilization Rates
High Specification
Semis
No's
After
2013
2011
2012
2013
2014
2015
2016
2017
13
15
83%
83%
81%
81%
79%
74%
70%
Intermediate Semis
19
19
66%
83%
82%
81%
77%
75%
72%
Jack Ups
14
14
24%
70%
77%
75%
74%
73%
72%
2011
2012
2013
2014
2015
2016
2017
Average Day Rates:
High Specification
Semis
No's
After
2013
13
15 435,000 440,000 455,000 469,000 435,000 437,000 435,000
Intermediate Semis
19
19 320,000 322,000 342,000 347,000 349,000 344,000 344,000
Jack Ups
14
14 110,000 112,000 117,000 121,000 124,000 131,000 137,000
Discounted Cash Flow
($ in millions, except per share amounts)
Discount Rate
22.6%
Discount Rate (Terminal Adjusted) 12.4%
Terminal Growth Rate
4.0%
FORECASTED
2012
2013
2014
2015
2016
Terminal
2017 Value
Year Ending December 31
2011
Net Income
$1,224.5 $1,478.7 $1,555.7 $1,688.2 $1,578.5 $1,558.1 $1,614.6
Add: D & A
349.6
347.1
344.9
439.2
436.0
433.1
430.4
Less: Changes in Net Working
Capital (NWC)
(46.6)
(176.7)
(99.8)
(92.3)
56.2
(7.4)
4.6
+ Change in A/R
+ Change in Other Current
Assets
138.9
99.2
53.4
54.4
(32.7)
5.8
(4.7)
(32.2)
(2.0)
4.0
(5.0)
4.0
(1.0)
0.0
- A/P and Accrued Taxes
and Liabilities
544.4
79.5
42.4
42.9
(27.5)
2.6
0.2
(604.6)
0.0
0.0
0.0
0.0
0.0
0.0
(350.0) (1,200.0)
(450.0)
(450.0)
(450.0)
(450.0)
- Other Current Liabilities
Less: Capex
FCF
PV FCF
(620.0)
907.4 1,299.2
$907.4 $1,031.1
600.8 1,585.0 1,620.6 1,533.7 1,599.5
$378.5
$792.4
$643.0
$482.9
$399.7
$18,559.6
$9,194.1
Valuation
Present Value of FCF's
11,780.3
Less: Outstanding Debt
1,495.6
Plus: Cash and ST investments
404.4
Outstanding Shares
139.0Million
Value per Share
$76.89
Discount Rate
Terminal Growth Rate
$76.89
19%
20%
21%
22%
22.6%
23%
24%
25%
2.50% $
70.47 $
69.76 $
69.07 $
68.41 $
68.06 $
67.78 $
67.18 $
66.59
3.00% $
73.10 $
72.39 $
71.70 $
71.04 $
70.69 $
70.41 $
69.81 $
69.22
3.50% $
76.03 $
75.31 $
74.63 $
73.97 $
73.61 $
73.34 $
72.73 $
72.15
4.00% $
79.30 $
78.59 $
77.90 $
77.24 $
76.89 $
76.61 $
76.01 $
75.42
4.50% $
82.99 $
82.27 $
81.59 $
80.93 $
80.57 $
80.30 $
79.69 $
79.11
5.00% $
87.17 $
86.46 $
85.77 $
85.11 $
84.76 $
84.48 $
83.87 $
83.29
5.50% $
91.96 $
91.24 $
90.56 $
89.90 $
89.54 $
89.27 $
88.66 $
88.08
Other Scenarios
Positive: Anticipation of utilization rates
in the 80s% with slightly higher day
rates
On average, revenues are higher by 9%
Fair Value Estimate: $91.90
Negative: Oversupply leads to lower
utilization rates and lower day rates.
On average, revenues are lower by 10%
Fair Value Estimate: $61.66
Multiples Valuation
Forward P/E
33%66.85
Price/Sales
33%86.87
TEV/EBITDA
33%100.61
Estimated Value
$84.78
Recommendation
To place a limit sell order@$80.00.
(for 50 shares purchased in Nov
2008 @ $72.96)
Long Term Capital Gain of: $352
(4.82%)