Diamond Offshore Drilling Inc.

1
Diamond Offshore Drilling Inc.
2
Agenda

• Industry Analysis
• Competitors
• Company Overview
• Company Performance
• Valuation
• Recommendation

3
Holdings History

• February 2008
• Purchased 100 shares _at_ 122.82
• November 2008
• Purchased 50 shares _at_ _at_72.96
• April 2009
• Sold a Sep. 80 call _at_5.85
• Bought a Sep. 60 put _at_4.78
• September 2009
• Sold 100 shares _at_ 76.25 vs. exercise adjusted
  strike on short call
• October 2010
• Purchased 100 shares _at_ 68.02
• March 2011
• Recommendation to sell 50 shares _at_ 80 limit NOT
  APPROVED

4
Holdings Continued

• On Wednesday October 26, 2011
• DO closed _at_ 65.15
• Currently hold 150 shares
• Currently DO holdings are 2.86 of total
  portfolio holdings.

5
Industry

• Demand is driven by oil and gas prices
• Offshore drilling requires specialized equipment
  such as drill ships, semi-submersible rigs,
  jack-up rigs
• Deepwater drilling is expect increase in the next
  few years
• Large oil and gas field services companies
  typically do their business internationally

6
Competitor

• Transocean (RIG)
• Largest offshore drilling firm (18 B market cap)
• Noble Corporation (NE)
• - Swiss offshore firm (9 B market cap)
• Ensco PLC (ESV)
• - Founded in 1975 in British (11.9 B market cap)

7
Fleet Comparison
Competitor
Company High-Specification Floaters Intermediate Semisubmersibles Jack-ups Total
DO 14 19 13 46
RIG 47 25 63 135
NE 7 19 45 71
EVS 7 20 48 75
Source DO, RIG, NE, EVS 2010 annual report
8
Revenue distribution comparison
Competitor
Do Do RIG RIG ESV ESV NE NE
Total Revenue 3322 100 9576 100 1696 100 2,807 100
  South America 1308 39 0 0 527 19
  Australia/Asia/Middle East 641 19 0 502 30 636 23
  United States 635 19 2117 22 378 22 585 21
  Europe/Africa 601 18 1183 12 341 20 503 18
  Mexico 136 4 0 0 553 20
Other contries 6276 66 475 28
Source bloomberg
9
Performance comparison
Competitor
P/E 1-yr return Earning margin (12 months) ROE Debt/Equity
DO 8.83 -7.11 29.70 25.40 35.00
RIG 498.4 -14.40 0.40 -0.40 53.00
NE 26.35 3.86 13.20 4.50 47.80
ESV 17.48 7.94 24.40 5.30 47.80
Source yahoo finance
10
Company Overview

• Diamond Offshore Drilling, Inc.is a leading
  deepwater drilling contractor, owns and operates
  one of the largest fleets of offshore drilling
  units in the world. The company's diverse fleet
  consists of 32 semisubmersibles, 13 jack-ups and
  four dynamically positioned drillships, three of
  which are on order with delivery expected in 2013
  and 2014
• We provide offshore drilling services to a
  customer base that includes major independent oil
  and gas companies and government-owned oil
  companies.
• source http//www.diamondoffshore.com
  /

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Global Presence
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Global Presence
Region 2010 2009 2008
United States 19.13 33.95 40.72
South America 39.38 19.73 16.47
Australia/Asia/Middle East 19.30 19.76 15.72
Europe/Africa/Mediterranean 18.09 17.66 17.89
Mexico 4.10 8.90 9.19
Source DO 2010 Annual Report
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The Fleet

• Jack-up Semisubmersible
  
• 
  Drillship Drilling ship

Source http//www.boemre.gov/tarprojectcategories
/structur.htm
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Jack-up

• Jack-ups rigs are mobile, self-elevating drilling
  platforms equipped with legs that are lowered to
  the ocean floor until a foundation is established
  to support the drilling platform.
• Used for drilling in water depths from 20 feet to
  350 feet.
• Currently have 13 jack-up drilling rigs

Source http//www.offshore-technology.com/project
s/goldeneye/goldeneye4.html
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Semisubmersible

• Semisubmersible operate in a semi-submergedposi
  tion, remaining afloat, off bottom, typically
  anchored in position and remain stable for
  drilling in the semi-submerged floating position
• High-specification semisubmersibles are generally
  capable of working in water depths of 4,000 feet
  or greater or in harsh environments
• Intermediate semisubmersibles generally work in
  maximum water depths up to 4,000 feet
• Currently have 32 semisubmersibles

Source http//www.glossary.oilfield.slb.com/Displ
ayImage.cfm?ID639
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Drillship

• Typically self-propelled, positioned over a
  drill site through the use of either an anchoring
  system or a dynamic-positioning system similar to
  those used on certain semisubmersible rigs.
• Capable of working in water depths as deep as
  12,000 feet
• Currently have one high-specification drillship,
  the Ocean Clipper.
• Three drillships under construction, BlackHawk
  and BlackHornet will be delivered in 2013 while
  BlackRhino in 2014.The former two have already
  signed contracts with Anadarko with day rates
  of 495K/day and total backlog of 1.8 billion

Source http//www.diamondoffshore.com/
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Business model and Revenue drivers

• Day rate Contracts

• Revenue Drivers

• Our contracts to provide offshore drilling
  services vary in terms and provisions. We
  typically obtain our contracts through
  competitive bidding
• Guaranteed a fixed day rate basis regardless of
  whether or not such drilling results in a
  productive well

• Day rate the rate that DO charges an operator
  for each day over contract period for the
  utilization of rigs
• Utilization rate the actual percentage of time
  in a year a rig is utilized

Source DO 2010 Annual Report
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Trends of Revenue Drivers
Source DO 10Q from 2004 to 2011
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Aging Problem of Fleet

• DOs fleet is actually the oldest in offshore
  drilling industry with an average age of 32
  years.

Source http//www.rigzone.com/news/article.asp?a_
id48839
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Negative result of fleet aging

• The upgrade of fleet would cost several billions,
  it would prevent the fleet from becoming outdated
  and help create long-term value. Rather than
  hoard cash for potential rig-buying opportunities
  at the bottom of the cycle, Diamond has been
  paying out its excess capital to shareholders in
  the form of special dividends, which is 0.75
  dollars per quarter
• The substantial increase in activity is placing
  tremendous stress on the industry's aging rig
  fleet. Diamond has been slower than its peers in
  upgrading its fleet and ordering new rigs to
  handle rich ultra-deep-water contracts.
• Diamond will have higher maintenance expenditures
  than peers' in the next few years.
• Once current contracts expire, Diamond's old rigs
  will be competing with peers' upgraded and ultra
  deep-water rigs for lucrative contracts. We think
  customers will pay more to retain peers' rigs for
  challenging jobs, which will leave Diamond with
  lower fleet-utilization and day rates.
  Ultimately, Diamond's profitability would be
  severely damaged.

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ROE Analysis
() 06 07 08 09 10
EBIT Margin 45.8 47.3 54.0 52.2 41.9
Asset Turnover 61.5 66.3 89.0 70.5 59.7
Leverage Ratio 178.2 150.9 147.4 172.5 174.2
Interest Ratio 101.5 101.0 100.1 97.6 93.7
Tax Burden 73.2 67.9 71.0 73.7 71.5
ROE 37.3 32.4 42.0 39.4 25.4
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Multiple P/E
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Multiple P/E

• Correlation between price and earnings
• Investors responded to BP oil spill
• Price was driven by the market in the pass year

P/E in last 3 years P/E in last 3 years
Highest 11.85
Lowest 5.76
Average 8.9
10/24/2011 8.83
Source Yahoo Finance
24
Multiple P/E

• DO is among the top before the oil spill incident
• Recent soar in P/E is not healthy
• Stock price went down
• Earning decreased even more
• Use 5-year average

DO RIG ESV NE
5-year Avg 12.31 11.97 9.46 11.17 11.23
25
Multiple P/E

• In the coming years
• Market shows optimism on Euro debt issue
• Industry average P/E is 11.23 for the past 5 year
• DO reported increase in third quarter earning
• DO was among the top before the oil spill
  incident
• P/E may rise, but we do not expect P/E to jump
  over historical high
• Use P/E 10 for projection
• Estimated Price is 90.60

P/E in last 3 years P/E in last 3 years
Highest 11.85
Lowest 5.76
Average 8.9
10/24/2011 8.83
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Multiple P/S
Price v.s. Earning
Price v.s. Sales
Source Capital IQ
27
Multiple P/S

• Net margin now is lower than it was from 2006 to
  2009
• P/S was 2.63 on Oct. 24, 2011
• We do not expect a great raise in P/S
• Use P/S 2.8 for projection
• Estimated Price is 67.12

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Multiple P/BV
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Recommendation
Estimated Price
DCF 74.54
P/E 90.60
P/S 67.12
Recommendation Hold for now