Offshore Drilling with High Yield, Backlog, and Efficiency

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Diamond Offshore Drilling (NYSE: DO) is having a down year.

For the nine months ending on Sept. 30, the company’s revenue is down 13.13% year over year. In Q3 2012, Diamond Offshore’s revenue declined by 16.97% and net income declined by 31% year over year. The decline in earnings is the result of lower utilization and day rates. In Q3 2012, Diamond Offshore reported year over year declines in day rates for its deepwater and mid-water floaters. The day rate for its ultra-deepwater floaters increased from the previous year, but utilization declined from 88% to 75%. Revenue from mid-water floaters, which accounted for 45% of the company’s total drilling revenue in Q3 2012, declined by 15% year over year.

In Diamond Offshore’s 10Q report, the company states, “Contract drilling revenue for the third quarter of 2012 was negatively impacted by an aggregate 350-day decrease in revenue earning days for our fleet, as well as a decrease in average daily revenue earned by our deepwater and mid-water floater fleets, compared to the third quarter of 2011. These unfavorable occurrences more than offset the favorable impact of an increase in average daily revenue earned by both our ultra-deepwater floater and jack-up fleets.”

Utilization and Backlog

However, Diamond Offshore’s current decline is a short-term trend. The following table shows offshore rig utilization (RIGZONE).

<table> <tbody> <tr> <td>Rig Type</td> <td>November 2012 Utilization (%)</td> <td>October 2012 Utilization (%)</td> <td>November 2011 Utilization (%)</td> </tr> <tr> <td>Drillship</td> <td>84.8</td> <td>84.8</td> <td>70.1</td> </tr> <tr> <td>Jackup</td> <td>82.8</td> <td>82</td> <td>81.6</td> </tr> <tr> <td>Semisub</td> <td>84.7</td> <td>84.2</td> <td>81.7</td> </tr> </tbody> </table>

As shown, rig utilization is on the rise. In addition, Diamond Offshore increased its backlog. Backlog is a good measure of a company’s future performance because it is revenue that the company will eventually earn. The rise in backlog should translate to revenue growth in the future. The following table compares Diamond Offshore with the other big shots in the industry.

<table> <tbody> <tr> <td>Contract Backlog (billions $)</td> <td>Q3 2012</td> <td>Q2 2012</td> <td>Q3 2011</td> <td>Change Year Over Year (%)</td> </tr> <tr> <td><strong>Transocean</strong> <span class="ticker" data-id="205219">(NYSE: <a href="">RIG</a>)</span></td> <td>29.662</td> <td>21.438</td> <td>23.486</td> <td>26.3</td> </tr> <tr> <td><strong>Seadrill</strong> <span class="ticker" data-id="224060">(NYSE: <a href="">SDRL</a>)</span></td> <td>21.3</td> <td>19.9</td> <td>13.5</td> <td>57.8</td> </tr> <tr> <td><strong>Noble Corp</strong> <span class="ticker" data-id="204637">(NYSE: <a href="">NE</a>)</span></td> <td>14.8</td> <td>14.4</td> <td>12.8</td> <td>15.6</td> </tr> <tr> <td><strong>Ensco</strong> <span class="ticker" data-id="203424">(NYSE: <a href="">ESV</a>)</span></td> <td>9</td> <td>10</td> <td>9</td> <td>0</td> </tr> <tr> <td>Diamond Offshore</td> <td>8.746</td> <td>8.632</td> <td>8.137</td> <td>7.48</td> </tr> </tbody> </table>

With the exception of Ensco, in Q3 2012, the backlogs for Transocean, Seadrill, Noble Corp, and Diamond Offshore all increased year over year. Seadrill had the biggest rise in backlog (year over year), but Transocean is still on top. Looking at revenues, for the first nine months in 2012, Transocean, Seadrill, Noble, and Ensco actually reported increases in revenue over the previous year.

Currently, Diamond Offshore has six rigs under construction including four drillships. The four drillships are rated for drilling at a maximum water depth of 12,000 feet. In addition, the two other rigs under construction, Ocean Onyx and Ocean Apex, are capable of drilling at water depths of up to 6,000 feet. Diamond Offshore is focusing on expanding its deepwater and ultra-deepwater fleets. The company defines deepwater as 5,000 to 7,000 feet and ultra-deepwater as 7,500 feet or more. These two segments have the highest day rates and utilizations for the company. In Q3 2012, Diamond Offshore reported an average day rate of $354K and utilization of 75% for its ultra-deepwater floaters. Deepwater floaters had an average day rate of $373K and utilization of 95%. Besides having higher day rates and utilizations, the deepwater and ultra-deepwater segments are good areas to focus on because there is a natural trend to deeper water drilling.

It Comes Down to Efficiency

Furthermore, despite Diamond Offshore’s recent struggles, the company is still highly efficient. The following chart compares the company’s return on assets (ROA) to its peers.

<img src="" />

RIG Return on Assets data by YCharts

While Diamond Offshore’s ROA has declined, it is still above 10% and above its peers. Transocean has a big negative ROA because it is still facing charges from the Deepwater Horizon oil spill. For the trailing twelve months, Diamond Offshore has an ROA of 10.75%. This reflects well on the management.

Yield: 5.1%

Focusing on value, Diamond Offshore currently has a PE ratio of 12.7. In addition, the company has a strong balance sheet. It has a current ratio of 4.9, total debt to equity ratio of 0.3, long-term debt of $1.5 billion, and total current assets of $2.1 billion. Lastly, the company has a “hidden” dividend yield of 5.1%. It is hidden because Diamond Offshore pays the majority of its dividends as special dividends. However, since the second half of year 2010, these special dividends have come in at a constant $0.75 per quarter. Using TTM EPS, Diamond Offshore has a sustainable payout ratio of 65%. Diamond Offshore Drilling remains a good investment.

iamgreatness has no positions in the stocks mentioned above. The Motley Fool owns shares of Transocean and Seadrill. Motley Fool newsletter services recommend Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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