Diamond Offshore
Drilling Inc.
Katsy Douangvichit
Tyson Banbury
Nate Evett
Matt Hawk
http://images.businessweek.com/ss/09/02/0224_safe_dividends/10.htm
October 28, 2010
Agenda
•
Company Overview
•
Industry Overview
•
Competitors
•
SWOT Analysis
•
Porter’s 5 Forces
•
Valuation
•
Recommendation
Company Overview
Summary
•
•
•
Provides contract drilling services to energy industry
Leader in deepwater drilling for oil and natural gas on a global scale
One of the world’s largest fleets of offshore drilling rigs
Basic Info
•
•
•
•
Ticker: DO
Employees: 5,500
Price: $67.80
Headquarters: Houston, TX
Global Presence
•
•
•
•
•
Gulf of Mexico (GOM)
Mexico
Europe/Africa/Mediterranean
Australasia/Asia/Middle East
South America
http://www.diamondoffshore.com/ourCompany/ourcompany_overview.php
Company Overview
Portfolio Performance
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
As of 10/27/2010
•
•
•
Diamond Offshore closed at $67.80
Currently have 50 shares with an unrealized loss of 7.07%
Represents 2.93% of the portfolio
Company Overview
Recent Performance
http://finance.yahoo.com/echarts?s=DO+Interactive#chart1
•
DO stock down 36% since beginning of 2010
•
Recently passed 20-day Moving Avg., anticipate crossing 200-day Moving Avg.
Company Overview
History
Diamond Offshore Drilling is formed:
•
•
1980’s – Loews Corp. (diversified holding company) purchases
Diamond M Drilling.
1992 – Diamond M Drilling Co., under Loews ownership, purchases
all outstanding stock of ODECO
•
1993 – name changed to Diamond Offshore Drilling Inc.
•
1995 – began trading on NYSE under symbol “DO”
•
1996 – Diamond Offshore acquired Arethusa Ltd. and sold land
division Diamond M Onshore to DI Industries Inc.
Key Takeaway: Diamond Offshore has a longstanding history in the
drilling industry, and all barge, platform, and land rigs acquired in
previous transactions have been been sold to focus on offshore drilling
http://www.diamondoffshore.com/ourCompany/ourcompany_history.php
Company Overview
Business Model – Oil Industry
Upstream – Exploration
and Production
Midstream –
Transportation and
Refinement
Downstream –
Distribution and Sales
http://www.nwofighters.org/wp-content/uploads/2010/05/oil-rig.jpg
http://safetyactconsultants.com/yahoo_site_admin/assets/images/Wast_Oil_Refinery.320175601.jpg
http://www.annualreports.com.my/uploads/news/small/9_shell-gas-station-bar-b-cutie.jpg
Company Overview
Business Model – Drilling Contracts
Exploratory Drilling
•
Drill wells in previously
unexplored areas as directed by
customer (operator)
Development Drilling & Well
Completion
•
•
Drill additional wells in areas of
successful exploration
Complete wells by preparing
them for continued hydrocarbon
extraction by operators
http://csdms.colorado.edu/wiki/Talk:Marine_Discussion
http://www.epmag.com/archives/features/761.htm
Company Overview
Different Categories of Rigs
•
•
•
High Specification Floaters
•
Drill in water depths greater than 4,000 ft.
Intermediate Submersibles
•
Drill in water depths less than 4,000 ft.
Jack-ups
•
Drill in water depths less than 350 ft.
Drivers of revenue
•
Day Rates
•
•
Utilization rates
•
•
The per day rate Diamond Offshore charges clients for use of rigs
The percentage of fleet that is currently under contract to clients
Number of rigs
•
Number of rigs in Diamond Offshore’s fleet
http://www.diamondoffshore.com/ourCompany/ourcompany_offshorerigbasics.php
Company Overview
Business Model – Revenue Drivers
Number
of Rigs
Average1
Utilization Rate
Average1 Day Rate
($ thousands)
Avg % Total
Revenue
High-Spec
Floaters
13
83.4%
356.1
49.6%
Intermediate
Semis
20
83.4%
249.2
34.7%
Jack-Ups
13
77.7%
112.6
15.5%
1
GOM/
Mexico
High-Spec: 13
South
America
Averages using 2005-2009
Europe/Africa/
Mediterranean
Australasia/Asia/
Middle East
2
6
3
2
Intermediate: 20
1 (2)2
9
4
3 (1)2
Jack-Ups: 13
4 (4)2
1
3
1
2
•
•
Denotes cold-stacked rigs
85% of revenue comes from Intermediate Semis and High-Spec Floaters
Total Rigs: 46 [6 cold stacked rigs GOM, 1 in Malaysia]
Company Overview
Business Model – Geographic Distribution
Total revenue per region $ in millions (% of total revenue)
Geographic Region
2006
2007
2008
2009
GOM
1,114.2
(56.1%)
1,226.5
(48.9%)
1,375.6
(39.6%)
1,138.2
(32.2%)
Mexico
96.5
(4.9%)
148.6
(5.9%)
325.8
(9.4%)
323.1
(9.1%)
Australia/Asia/
Middle East
323.0
(16.3%)
400.7
(16.0%)
557.1
(16.0%)
717.7
(20.3%)
Europe/Africa/
Mediterranean
250.1
(12.6%)
473.7
(18.9%)
634.0
(18.2%)
641.2
(18.1%)
South America
203.3
(10.2%)
256.2
(10.2%)
583.9
(16.8%)
716.4
(20.3%)
•
Reducing exposure to GOM prior to drilling moratorium
Strong 08-09 growth in South America and Australia/Asia/Middle East despite global
economic downturn
•
http://www.diamondoffshore.com/investors/investors_secfiling.php
•
Industry Overview
Macroeconomic Drivers – Global Recovery
Source: World Economic Outlook, 2010
http://www.imf.org/external/pubs/ft/weo/2010/01/c1/fig1_2.pdf
•
•
Global GDP growth expected to taper gradually after rebound from recession
Translates into gradual increase in demand for oil in near future with expected
higher growth in demand after 2015
Industry Overview
Macroeconomic Drivers – Key Players
•
•
•
China and India projected to
have over 5% GDP growth in
2010-2011 (1)
Along with the U.S., Brazil,
Russia and Japan, these two
countries make up the top six
oil-consuming nations
Brazilian government pledges to
keep oil supply ahead of
growing economy via Petrobras
World Economic Outlook, 2010
http://www.imf.org/external/pubs/ft/
weo/2010/01/c2/fig2_1.pdf
(1)
Source: World Economic Outlook, 2010
http://www.imf.org/external/pubs/ft/
weo/2010/01/c1/fig1_19.pdf
Industry Overview
Macroeconomic Drivers – Demand For Oil
1. United States
2. China
3. Japan
4. India
5. Russia
6. Brazil
7. Germany
8. Saudi Arabia
9. Korea, South
10. Canada
11. Mexico
12. France
13. Iran
14. United Kingdom
15. Italy
8,200,000
4,363,000
2,980,000
2,850,000
2,460,000
2,437,000
2,430,000
2,216,000
2,151,000
2,078,000
1,875,000
1,809,000
1,669,000
1,537,000
0
10,000,000
18,690,000
20,000,000
Barrels of Oil Consumed Daily
Source: https://www.cia.gov/library/publications/
the-world-factbook/rankorder/2174rank.html,2009
http://graphics.thomsonreuters.com/10/04/GLB_
OILDMND0410.gif
Industry Overview
Macroeconomic Drivers – Price of Crude
Source: World Economic Outlook, 2010
http://www.imf.org/external/pubs/ft/weo/2010/01/c1/fig1_19.pdf
•
•
•
Oil prices expected to remain around $85 per barrel over near term
Stable price projected due to expectation of meeting increase in oil demand
with increased production
Increased production puts upward pressure on rig utilization and day rates,
driving up DO’s revenues
Industry Overview
Industry Outlook – GOM Moratorium
•April
20, 2010, Deepwater Horizon rig, owned by Transocean Ltd., experiences
blowout leading to explosion and largest offshore oil spill in U.S. history.
•May
28th, government imposes ban on drilling new wells over 500 ft
•June
•July
21st, Judge Martin Feldman halts moratorium
12th, second moratorium implemented and scheduled to end November 30th
•October
12th, drilling ban lifted
Impact:
•Industry
faces increased operating costs due to increased regulation
•
New standards for Blowout Preventers (BOPs) and cementing wells
•
Lengthened process to acquire drilling permits
•Relocation
•Slow
of 2 DO rigs to international contracts
return to GOM due to new regulations and increased auditing cost
Competitors
Noble Corporation
•
•
•
•
•
Business strategy is to actively expand international and
deepwater drilling through acquisitions, modifications, and
upgrades
Fleet has 15 deepwater rigs, 50 Jackups, 4 Drillships
Completed purchase of Frontier Drilling in July 2010
• This increased fleet by 7 rigs to 69 total platforms
• 5 more rigs currently under construction
Noble has mobilized 9 rigs from GOM to international
markets in the past 5 years
Stock currently trading on NYSE at $34.32 (10/28/2010)
Feb. 26, 2010 10-k – Item 7: Management’s Discussion
Noble Webpage RigFleet Section: http://www.noblecorp.com/Fleet/FleetOverview.asp
Noble Corporation Fleet Status updated 29 September 2010
http://finance.yahoo.com/q?s=ne
Competitors
Ensco
•
•
•
•
•
Business is divided into four units
• Ulta-deepwater
• Asia/Pacific Rim
• Europe/Africa
• North and South America
Fleet includes 8 deepwater and 40 Jackups
Leverage ratio is lowest among DO, Noble, and Transocean
Rate #1 in safety and reliability by EnergyPoint Research Inc.
Stock currently trading on NYSE at $46.40 (10/28/2010)
http://finance.yahoo.com/q?s=ESV
ENSCO web page Global Operations Section http://www.enscous.com/Global
Operations/Capabilities/default.aspx
ENSCO fleet status report Oct. 13, 2010
http://seekingalpha.com/article/224240-the-oil-and-gas-industry-s-answers-lie-within
Competitors
Transocean
•
•
•
•
•
•
World’s largest offshore driller with 114 rigs
• Only 23 deepwater rigs, 65 Jackups
• Less emphasis on deepwater specialization
Implicated in the April 2010 Deepwater Horizon oil rig
explosion in GOM
Reputation has suffered as a result
Ranked last among drillers in 2008 and 2009 for job quality
Merged with GlobalSantaFe in 2007
Stock currently trading on NYSE at $64.16 (10/28/2010)
http://finance.yahoo.com/q?s=rig
Transocean 2010 Fleet Directory Brochure
www.reuters.com/article/idUSN0322326220100603
http://seekingalpha.com/article/224240-the-oil-and-gas-industry-s-answers-lie-within
www.deepwater.com/fw/main/Merger-307.html
Competitors
Recent Performance
Source: Yahoo! Finance http://finance.yahoo.com/echarts?s=DO+Interactive#chart4:symbol=do;range=20081028,
20100927;compare=esv+ne+rig+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;
source=undefined
•
•
•
Strong divergence at outset of GOM disaster
Ensco and Noble have less exposure to deepwater drilling
Anticipate DO recovery in future despite increased U.S. drilling
regulations due to continued further global diversification
Competitors
Diamond Offshore – How They Differentiate
•
DO has larger percent of floaters in fleet due to customers’ demand
for high-tech, efficient rigs
•
•
•
Floaters not limited to shallow drilling
Floaters can withstand harsher weather and sea conditions
Historically, DO has paid out significantly more in dividends than its
competitors
•
•
From 2006-2009, DO paid out $17.88 while the closest competitor
Transocean paid out only $1.58
Reason to believe DO will increase dividend in future since it remains
a key part of their long-term value creation
2009 Annual Report Item 1: Business – The Fleet
Diamond Offshore Web page Offshore Rig Basics
Seeking Alpha Diamond Offshore Drilling Q2 2010 Earnings Call Transcript
Competitors
Rig & Financials Comparison
Diamond Offshore
Noble Corp.
ENSCO
Transocean
Floaters
32
16
6
64
Jackups
13
45
38
63
Drillships
1
8
-
-
Other
-
-
1
5
Under Construction
-
5
4
-
46
74
49
132
Total
Market
Cap
(billion)
Trailing
P/E (ttm)
Forward
P/E
Revenue
(billion)
(ttm)
Net Income
(billion)
(ttm)
Cash on
Hand
(billion)
OCF
(billion)
(ttm)
Current
Ratio
Diamond
Offshore
$9.96
8.63
10.51
$3.48
$1.38
$1.50
$1.41
2.97
Noble
$9.19
6.38
8.25
$3.40
$1.45
$1.08
$2.15
3.86
Ensco
$6.80
10.05
11.13
$1.81
$0.60
$1.24
$1.05
4.05
Transocean
$21.39
7.67
8.63
$10.66
$2.81
$2.92
$5.02
1.27
http://www.diamondoffshore.com/ourFleet/rigStatus.php
SWOT Analysis
Firm Factors
Strengths
• One of the first drillers to
move away from Gulf of
Mexico (GOM)
• Majority of rigs have deep
nominal drilling depth
(10,000+ ft.)
• Most rigs committed short
term (80% of semis for 2010)
• Conservative business
approach: invested in new rigs
in the downturn, got them for
discount
Weaknesses
• Increasing dependence on
few customers (15 of their 33
floaters contracted by two
Brazilian customers)
• Gulf of Mexico rigs still
comprise 20% of projected
2011 revenue
• Increased idle times for rigs
due to regulation
SWOT Analysis
Industry Factors
Opportunities
• Growth in some geographic
locations including Brazil and
Greenland
• Increased demand for ultradeepwater rigs
Threats
• Compliance with new regulations
in GOM
• Cyclical industry
• Lack of increased oil demand
would result in oversupply of rigs
leading, lowering day rates
Porter’s 5 Forces
Threat of New Entrants (Low): The oil drilling industry requires highly specialized workers to
operate the machinery. Since the equipment is so expensive and the labor is costly, any
newcomers to the industry would have to be well capitalized.
Power of Suppliers (Medium): The rig builders have more bargaining power when the price
of oil is high and there is increased drilling activity, and thus increased demand for drilling
platforms. When the price of oil is low, there is not a lot of demand for rigs, so the builders
have little power.
Power of Buyers (Medium): Since oil is a commodity, the buyers can go with the company
that will drill for the lowest contracted day rate. However, there are only a limited number
of drillers with the capability to drill at extreme depths, so the buyers have to go with one
of them.
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.
Valuation – Base Case
Discount Value
•
•
•
•
•
CAPM Cost of Equity = 8.12%
Annualized ROI (1999-2001)= 35.40% - Used for 2010-2016 FCF’s
Annualized ROI (2005-2010)= 19.33% - Used for Terminal FCF
Cost of Debt = 5.4%
Discount rates = 19.31% (2010-2016)
12.37% (Terminal)
http://finance.yahoo.com/echarts?s=DO+Interactive#chart4:symbol=do;range=20081028,20100927;compare=
esv+ne+rig+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source
•
The estimated 2010 -2016 future rate of return to investor was chosen based upon the
assumption of future moderate growth similar to that of growth of DO during 1999-2001
Valuation
DCF Valuation
($ in millions, except per share amounts)
FY Ending 12/31:
Net Income
Add: D & A
2011
$1,009.2
423.6
2012
$1,277.0
447.1
78.6
0.0
54.0
(133.1)
0.0
(30.3)
95.8
(50.0)
(31.1)
(242.5)
50.0
(17.2)
(174.0)
0.0
(25.5)
48.8
(50.0)
(13.4)
(198.6)
50.0
(22.4)
58.5
35.4
226.5
467.5
16.0
9.5
(137.9)
1,384.4
98.9
16.8
130.4
892.5
51.2
1.5
(157.0)
1,578.1
138.3
7.2
(54.0)
2,000.4
48.2
22.2
55.8
1,100.9
49.8
8.5
(112.8)
1,186.3
($89.5)
$962.1
-107.97% -1174.84%
$346.4
-64.00%
$308.0
-11.08%
$1,557.1
405.55%
$1,528.1
-1.86%
$17,822.3
$204.0
$152.0
$644.1
$529.9
$8,850.4
Changes in Net Working Capital (NWC)
Plus: A/R
Plus: Assets Held for Sale
Plus: Prepaid Expenses
Less: A/P and Accrued Liabilities
Less: Taxes Payable
Less: Changes in NWC
Less: Capex
FCF
% Growth
PV FCF
FORECASTED
2013
2014
$1,577.9
$1,784.0
503.6
578.5
2010
$990.4
373.0
$1,122.4
2426.95%
$1,122.4
DCF Valuation
Present Value of FCF's
Less: Outstanding Debt
Plus: Cash and ST investments
Equity Value
Value per Share
Equals Value +/- 10%
($75.0)
$675.9
2015
$1,997.5
604.6
12,103.7
1,495.4
777.4
11,385.7
$81.89
$73.70
$90.08
2016
Terminal Value
$2,193.5
633.7
Valuation
Sensitivity Analysis
Sensitivity Table
GROWTH
RATE
$81.89
15.00%
16.00%
17.00%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
$74.47
$77.46
$80.78
$84.46
$88.59
$93.24
$98.52
$104.57
$73.82
$76.82
$80.13
$83.82
$87.94
$92.60
$97.88
$103.93
$73.21
$76.20
$79.52
$83.20
$87.33
$91.98
$97.26
$103.31
Discount Rate
19.31%
$72.62
$71.90
$75.62
$74.89
$78.93
$78.21
$82.62
$81.89
$86.74
$86.02
$91.39
$90.67
$96.68
$95.95
$102.73
$102.00
18.00%
20.00%
21.00%
22.00%
23.00%
$71.53
$74.53
$77.84
$81.53
$85.65
$90.31
$95.59
$101.64
$71.03
$74.02
$77.33
$81.02
$85.15
$89.80
$95.08
$101.13
$70.54
$73.54
$76.85
$80.54
$84.66
$89.32
$94.60
$100.65
$70.08
$73.08
$76.39
$80.08
$84.20
$88.85
$94.14
$100.19
Ratio Valuation
Triangulation
TRIANGULATION
Valuation Method
Weight
Forward P/E
Price/Sales
TEV/EBITDA
DCF
Triangulated Value
15.00%
15.00%
20.00%
50.00%
Price
$71.60
$68.90
$82.51
$81.89
$78.52
Bad Scenario
Assumes DO experiences another stretch of suppressed
revenue streams
•
•
•
Dayrates and Utilizations rates decline
Increased regulatory costs decrease margins
Do not begin to pick up until 2014
($ in millions, except per share amounts)
FY Ending 12/31:
Net Income
Add: D & A
FORECASTED
2013
2014
$604.9
$728.4
456.7
510.9
2010
$990.4
373.0
2011
$584.4
413.6
2012
$600.9
420.4
Changes in Net Working Capital (NWC)
Plus: A/R
Plus: Assets Held for Sale
Plus: Prepaid Expenses
296.6
0.0
54.0
(94.7)
0.0
3.2
127.1
(50.0)
(2.2)
(44.7)
50.0
(0.1)
(84.0)
0.0
(15.0)
(46.8)
(50.0)
(9.5)
(79.2)
50.0
(13.8)
Less: A/P and Accrued Liabilities
Less: Taxes Payable
Less: Changes in NWC
Less: Capex
58.5
35.4
444.5
467.5
(99.1)
(10.2)
(200.8)
1,184.4
2.9
0.4
78.2
550.0
(3.5)
(4.6)
(3.0)
1,145.8
79.8
4.4
(14.8)
1,539.9
34.2
13.6
(58.6)
628.1
32.0
5.4
(5.6)
681.9
$1,340.4
2917.55%
($387.2)
-128.89%
$549.5
-241.93%
($87.1)
-115.85%
($315.4)
262.04%
$643.1
-303.93%
$786.0
22.22%
$1,340.4
($324.5)
$386.1
($51.3)
($155.7)
$266.1
$272.6
FCF
% Growth
PV FCF
TRIANGULATION
Valuation Method
Weight
Forward P/E
Price/Sales
TEV/EBITDA
DCF
Triangulated Value
15.00%
15.00%
20.00%
50.00%
Price
$71.60
$68.90
$82.51
$40.05
$57.60
2015
$813.1
516.7
2016
Terminal Value
$948.6
525.0
$9,167.6
$4,552.5
Good Scenario
Oil prices rise sharply
• Dayrates and utilization rates rise rapidly
• Emerging markets spur global demand for oil in deepwater
• Moratorium has little lasting effect on GOM
•
($ in millions, except per share amounts)
FY Ending 12/31:
Net Income
Add: D & A
FORECASTED
2013
2014
$2,010.3
$2,221.9
525.3
609.7
2010
$990.4
373.0
2011
$1,155.7
427.9
2012
$1,534.7
458.3
78.6
0.0
54.0
(225.4)
0.0
(44.6)
68.1
(50.0)
(42.7)
(345.8)
50.0
(31.7)
(188.8)
0.0
(27.0)
82.3
(50.0)
(11.6)
(259.7)
50.0
(31.0)
58.5
35.4
226.5
467.5
65.2
18.0
(186.9)
1,470.0
137.7
23.5
136.5
1,035.3
98.5
8.0
(221.0)
1,798.3
153.9
6.7
(55.1)
2,214.8
41.4
24.1
86.4
1,302.3
74.6
12.5
(153.6)
1,425.6
FCF
$1,122.4
($73.3)
$1,094.2
$516.4
$561.6
$1,852.7
$1,807.7
PV FCF
$1,122.4
($61.4)
$768.7
$304.1
$277.2
$766.4
$626.8
Changes in Net Working Capital (NWC)
Plus: A/R
Plus: Assets Held for Sale
Plus: Prepaid Expenses
Less: A/P and Accrued Liabilities
Less: Taxes Payable
Less: Changes in NWC
Less: Capex
TRIANGULATION
Valuation Method
Weight
Forward P/E
Price/Sales
TEV/EBITDA
DCF
Triangulated Value
15.00%
15.00%
20.00%
50.00%
2015
$2,424.3
644.4
Price
$71.60
$68.90
$82.51
$97.51
$86.33
2016
Terminal Value
$2,703.5
683.4
$21,083.6
$10,469.9
Recommendation
Suggested Action:
•Current
•DCF
Price: $67.80
Value: $81.89
•Triangulation:
•
$78.52
We recommend that we purchase 100 shares of Diamond Offshore
Diamond Offshore Drilling Inc.
http://images.businessweek.com/ss/09/02/0224_safe_dividends/10.htm
October 28, 2010