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Diamond Offshore Drilling Inc.: Industry and Company Analysis

This presentation covers macroeconomic and industry outlooks, a company overview of Diamond Offshore Drilling, business drivers, financial analysis, and recommendations. It delves into the offshore drilling industry's dynamics and explores the competitive landscape.

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Diamond Offshore Drilling Inc.: Industry and Company Analysis

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  1. Diamond Offshore Drilling Inc. University of Illinois at Urbana-Champaign Real Client Managed Portfolio – Pranay Damania, Chia-Chia Hu, Juan Espinosa, Gani Beket Presented, November 4, 2008

  2. Presentation Outline • Macroeconomic Outlook • Industry Outlook • Company overview • Business drivers • Financial Analysis • Recommendation

  3. 3 Macroeconomic outlook • Major macroeconomic variables: • GDP shrinks at 0.3% p.a. in 3Q 2008 • Increase in unemployment rate from 5.7% (07/08) to 6.1% (09/08) • Consumer confidence index hits its lowest levels in its history • Productivity index has positive tendency since 01/08 • Continued high volatility in stocks markets • Bearish trend in majority of commodity markets • High volatility of oil prices • Lack of confidence in international credit markets despite measures taken by central banks and governments • Fed cut rates to 1% to mitigate fears of economic recession

  4. 4 Industry Outlook • Share price is driven by oil prices • Extremely high correlation R2 = 0.78 Source: finance.yahoo.com, eia.doe.gov

  5. 5 Presentation Outline • Macroeconomic Outlook • Industry Outlook • Company overview • Business drivers • Financial Analysis • Recommendation

  6. 6 Oil prices down 28% from a year ago and 12% last week Global recession fears heighten concerns about declining energy demand. The OPEC slashed output by 1.5 million barrels per day (5% of its production) in an attempt to stabilize plunging oil prices as recession looms. Industry Outlook Short Term Energy Outlook

  7. Global Demand Growth 7 Industry Outlook Source: Oil Market Report. Oct, 2008

  8. 8 Industry Outlook Projections • Strong long run fundamentals • Strong demand in China and India going forward Source: www.eia.doe.gov

  9. 9 Presentation Outline • Macroeconomic Outlook • Industry Outlook • Company overview • Business drivers • Financial Analysis • Recommendation

  10. 10 Company Overview • Diamond Offshore offers offshore oil and gas drilling services to the energy industry worldwide. • The company started after several banks offered a Texas rancher and oil man to take control of a bankrupt onshore drilling company in the early 1960’s. Subsequently, DO, was formed in 1964.   • McMahon, the owner, took the company public in 1970 and expanded into offshore waters with the building and purchase of jack-up, barge, and semisubmersible rigs.

  11. 11 Company Overview • Fleet of 46 offshore rigs: • 30 Semi-submersibles • 15 Jack-ups • 1 Drill-ship • Objective - achieve optimum balance of flexibility and performance • More than 4 decades of global drilling experience, working in the harshest environments • 5,400 employees • Headquartered in Houston, Texas, and offices globally • 51% Owned by Lowes Corp (NYSE: LTR) • Experienced top-level management

  12. 12 Company Overview Business Profile • Oil companies drill two basic types of wells • - Exploratory (exploring new oil or gas deposits) • - Development (preparing discovery for production) • The Operator hires DO to drill exploratory/development wells offshore • The Oil Company chooses the location and supervises the operation, which may take 15 days to 12 months • DO drills and prepares wells for production in accordance with the requirements • DO charges drilling day-rates for leasing fleet of offshore oil rigs regardless of results

  13. 13 Backlog • As at July 1, 2008 the backlog reached $11 billion • Semisubmersible fleet is almost fully booked out in 2008-2009 Source: 10K, 10Qs

  14. SWOT Analysis 14 Company Overview

  15. 15 Presentation Outline • Macroeconomic Outlook • Industry Outlook • Company overview • Business drivers • Financial Analysis • Recommendation.

  16. 16 Business drivers The Fleet – Focused on Deep/Medium water Semisubmersible Drillship Jack-up *2007 10-K **2008 10Q’s

  17. 17 Business drivers Deepwater Drilling Source: fearnley offshore

  18. Deepwater day rates 18 Business drivers Source: Company Presentation 9/3/08

  19. 19 Business drivers Global Offshore Expenditures • Continued growth in offshore drilling, despite drop in oil prices, as E&P companies scramble to replace their aging reserves.

  20. 19 Presentation Outline • Macroeconomic Outlook • Industry Outlook • Company overview • Business drivers • Financial Analysis • Recommendation.

  21. 21 Highly competitive industry Numerous industry participants Transocean – Offshore Oil Drilling Noble Corp. – Offshore Oil Drilling ENSCO Intl. – Offshore Oil Drilling Rowan Co. – Offshore Oil and Land Drilling Pride Intl. – Offshore Oil and Land Drilling Financial Analysis Peer Group Comparison – Business Focus

  22. 22 Financial Analysis Peer Group Comparison

  23. 23 Financial Analysis 5 Yr Stock price – DO, NE, ESV, RIG, S&P500

  24. 24 Financial Analysis Comparison : Peer Companies

  25. 25 Financial Analysis Ratio Analysis : DuPont

  26. DCF assumptions Historical average day rates Source: 10Qs,10Ks, company data

  27. DCF assumptions Projected day rates *Based on company’s backlog as at September 22, 2008 Source: 10Qs,10Ks, company data, team estimates

  28. DCF assumptions Sales projections *Based on 9month actual figures + backlog for 4Q 2008 **2009 backlog as at September 22, 2008 Source: 10Qs,10Ks, company data, team estimates

  29. Model inputs 29 DCF assumptions

  30. DCF valuation DCF Valuation Source: 10Qs, company data, team estimates

  31. Sensitivity analysis 31 DCF valuation Source: team estimates

  32. Correlation Correlation with RCMP Portfolio Source: finance.yahoo.com

  33. RCMP Portfolio Current Portfolio

  34. Current Position 34 RCMP purchased 100 shares of DO on February 28th, 2008 for $122.90/share Currently DO is trading at $83.67 as of November 3, 2008 for an unrealized loss of $3,923 or 31.92% RCMP Portfolio

  35. 35 Presentation Outline • Macroeconomic Outlook • Industry Outlook • Company overview • Business drivers • Financial Analysis • Recommendation

  36. Recommendation 36 • Intrinsic Value = $94 - $115 • High intrinsic value with conservative assumptions • Strong long-term growth potential in deepwater drilling • Current Market Price = $83.67 • BUY 50 Shares RCMP Portfolio

  37. Thank You

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