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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 crude oil and
The contract for After refinement
natural gas are
drilling is given it is distributed
transported to
to the drilling downstream
the refineries of
company for through different
Oil and Gas
drilling a new distribution
Companies for
well at chains
refinement
designated area
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
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
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 Noble
Offshore 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
North South Europe/Africa/ East/Asia/
Company America America Mediterranean Australia Other Countries
Diamond
Offshore 42.80% 19.70% 17.70% 19.80%
Transocea
n 19.40% 13.50% 9.40% 57.70%
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 Transocean Noble Corp Ensco
2010 2009 2010 2009 2010 2009 2010 2009
High
Specification
Rigs 356 390 466 410 256 254 375 425
Intermediat
e
Specification
Rigs or
midwater
floaters 249 280 318 335 288 368 0 0
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 Transocean Noble Corp Ensco
2010 2009 2010 2009 2010 2009 2010 2009
High
Specification
Rigs 73% 81% 71% 86% 89% 91% 81% 85%
Intermediate
Specification
Rigs or
midwater 100
floaters 73% 89% 68% 69% 86% % 0 0
Jack ups 61% 72% 41% 55% 79% 82% 77% 75%
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=IROL-
secToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDA5NTAxMjMtMTEtMDE4NjA3L3RvYy9wYWdl
&ListAll=1&sXBRL=1
Transocean Forecasted Daily
Rates
Transocean ($000)
High Specification Jack ups 166 162 185 185 180 168
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
Australia/As Europe/Afric
ia/Middle a/Mediterra South
Rig Locations GOM Mexico East nean America
High Specification
Floaters 2* 0 3 2 7
Intermediate
Submersibles 3** 4*** 3 9
Jack-ups 6**** 2 3 1 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
Avg
Utilization Avg Day Avg % of Total
Type of Rig No's Rate Rate Revenue
By Rig Category
Type of Rig 2010 2009 2008
High Specification Floaters 44% 39% 38%
Intermediate Submersibles 48% 48% 47%
Jack-ups 8% 13% 15%
Total Revenues 3,229,517 3,536,579 3,476,417
•Approx 85 % Revenues come from high specification floaters and intermediate submersibles
SWOT Analysis
Strengths Weaknesses
Strong Fleet Increase in Long Term Debt
Strong International Concentrated Customer
Presence Base
Strong Contact Revenue Significant no. of old rigs
Backlog compared to competitors
Increase in insurance cost
Opportunities Threats
Positive Outlook for Oil and Tough Competition
Gas Sector Increasing Environmental
Increase in Demand for Regulations
Natural Gas and Liquid Operational Risk
Fuels in US
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
After
Utilization Rates No's 2013 2011 2012 2013 2014 2015 2016 2017
High Specification
Semis 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%
After
Average Day Rates: No's 2013 2011 2012 2013 2014 2015 2016 2017
High Specification
Semis 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 Discount Rate 22.6%
Discount Rate (Terminal Adjusted) 12.4%
($ in millions, except per share amounts) Terminal Growth Rate 4.0%
FORECASTED
Terminal
Year Ending December 31 2011 2012 2013 2014 2015 2016 2017 Value
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
Discount Rate
Price/Sales 33%86.87
TEV/EBITDA 33%100.61