Diamond Offshore Drilling, Inc. (NYSE:DO)

CAPS Rating: 4 out of 5

The Company provides contract drilling services to the energy industry around the globe and deals in deepwater drilling.

Recs

4
Player Avatar TheGarcipian (41.66) Submitted: 4/6/2007 3:23:43 AM : Outperform Start Price: $63.26 DO Score: +18.47

When the US pulls out of Iraq, expect the civil war there to continue for at least 3 more years (that's my estimate of how long it'll take the UN to get off their duff and stablize the area, if that's even possible). This will mean more & more disruption for oil production from Iraq. Iran will (again, my guess) attempt a maneuver like Iraq did in 1980, namely invading their neighbor during times of political turmoil in the hopes of gaining access to these oil reserves and essentially doubling their national output. This will continue to be good news for companies like Diamond Offshore which specialize in difficult-to-reach oil & gas reserves. DO drills in deep waters (1000-7500 ft) and has 22% of the worldwide supply of semisubmersible rigs. Deep water rigs are already in high demand, and with the political climate currently in the Mid-East, that demand will only increase. DO carries a small Forward P/E of 6.5 with a nice profit margin of 34% and ROE of the same. Debt/equity is in the middle of the pack for this industry, but is sporting a very nice PEG ratio of only 0.33.
SOURCEs: SmartMoney, April 2007, pp. 76-77; and Yahoo Finance.

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Member Avatar TheGarcipian (41.66) Submitted: 5/19/2008 11:29:45 PM
Recs: 1

As well as Diamond Offshore has done over the past year, I believe it will soar much higher, given the demands for oil-and-gas production. Until the USA stops cutting interest rates and/or starts raising them, the price of a barrel of oil will continue to be marked up, even if demand from China, Russia, India, the USA and Brazil were completely frozen in place right now. Truth is that demand is increasing and will continue to increase, particularly for a increasingly rare natural resource like petroleum. Yeah, I know, I'm probably on the outside with this thinking, but we've already hit peak oil production and are on the back side of that progression hill.DO continues to fire on all cylinders. Its PEG ratio is at an astoundingly low value of 0.42, with an EV/EBITDA value of 12.5 (a good value), profit and operating margins at 33.25% and 47.55%, RoA=20%, RoE=33.7%, very little debt for a company in this capital-intensive business (Debt/Equity is only 17%), a strong Asset/Liability ratio of 2.677, and decent cash flow. In my opinion, this is a good time to buy more of this stock, and that's exactly what I'm trying to do right now, if only it would stop running up and away from me! :-)

Member Avatar TheGarcipian (41.66) Submitted: 5/19/2008 11:35:47 PM
Recs: 1

Indeed, just after I posted the above, I found an article dated today (5/19/08) on TheStreet.com that includes the following blurb:"We have rated Diamond a buy since June 2005. Boosted by solid sales growth from its Contract Drilling business segment, Diamond's revenue surged 29% year over year to $666.7 million for the first quarter of fiscal 2008. Earnings rose 30%, fueled by a rise in daily rates for the company's deepwater rigs. Net income for the quarter increased to $290.6 million, or $2.09 a share, from $224.2 million, or $1.64 a share, in the year-ago quarter. In keeping with its policy of considering the payment of special cash dividends on a quarterly basis, the Board of Directors recently declared a special cash dividend of $1.25 per share of common stock in addition to a regular cash dividend of $0.125 per share of common stock. Both dividends are payable in June 2008. Finally, Diamond's debt-to-equity ratio is very low at 0.17, implying successful management of debt levels.While lower than a year ago, Diamond's gross profit margin remains high at 62%. However, the company's net profit margin of 37% significantly outperforms the industry. Furthermore, Diamond has demonstrated a pattern of positive EPS growth over the past two years, and we feel that this trend could continue. We feel that the slowdown in the U.S. economy and weak job data pose larger risks as they may put pressure on the demand for oil and gas. This could in turn disturb activities related to exploration and production, affecting the number of rigs that are operational in the market."I think the reason for the larger-than-industry profit margin is because it has managed its debt load so well. After all, if you're paying too much on debt, there's little left for improving profit margins.

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