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Leading oil and gas drilling contractor, Diamond Offshore Drilling Inc. (DO - Analyst Report), is expected to report its second quarter 2013 earnings on Thursday, Jul 25, before the opening bell. Let’s see how things are shaping up prior to the announcement.

In the last quarter, the company’s earnings of $1.27 per share increased 5% from $1.21 per share earned in the year-ago quarter. The outperformance was mainly backed by lower contract drilling expenses and interest overhead. The results also surpassed the Zacks Consensus Estimate of $1.15.

Growth Factors this Past Quarter

In the first quarter, revenues from the Contract Drilling segment fell 7.3% year over year to approximately $700.0 million, mainly due to a 6.8% decrease in total floaters revenue. These floaters accounted for 94.4% of the total quarterly contract drilling revenue, while jackups contributed 5.6%.

Ultra-Deepwater floaters recorded an average dayrate of $360,000 during the quarter, down from $364,000 in the year-earlier quarter. Deepwater floaters realized an average dayrate of $389,000 versus $359,000 in the year-ago quarter. Mid-water floaters recorded an average dayrate of $262,000, down from $266,000 in the year-earlier quarter. Jackup rigs’ dayrates averaged $85,000, down from $87,000 in the first quarter of 2012.

Rig utilization for Ultra-Deepwater floaters decreased to 73% from 85% in the year-ago quarter. Utilization of Deepwater floaters increased to 94% from 88% in the year-ago quarter. Mid-water category rig utilization was 64% compared with 65% in the comparable quarter last year while jackup rig utilization increased to 71% from 44%.

We continue to have a favorable view on Diamond Offshore based on its leverage to the global deepwater markets, attractive yield and solid backlog position. Going forward the driller will likely present investors with solid fundamentals given its significant free cash flow potential and clean balance sheet. These would enhance the possibility of further share buybacks and special dividends.

Diamond is aiming to increase its footprint in emerging markets (such as Brazil, Australia and West Africa) to reap benefits from the recent discoveries of deepwater fields. Again, the gradual improvement in the drilling market in the Gulf of Mexico (especially after the deepwater drilling ban was lifted), along with better bidding activity, will likely prove beneficial for contract drilling companies like Diamond Offshore.

However going forward, Diamond expects higher downtime and operating costs for the rest of 2013 that are likely to affect the company’s profitability. Further, the company's decision to reclassify four cold-stacked rigs as held for sale is likely to restrict the capacity for upgrades as was in the case of Ocean Apex and Ocean Onyx.

Earnings Whispers?

Our proven model does not conclusively show that Diamond is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive earnings Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here as you will see below.

Zacks ESP:  The earnings ESP for the stock is -1.59%.

Zacks Rank #3 (Hold): Valero’s Zacks Rank #3 (Hold) when combined with a -1.59% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and 5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:  

Memorial Production Partners LP (MEMP - Snapshot Report) with earnings ESP of +2.33% and a Zacks Rank #1 (Strong Buy).

Ferrellgas Partners LP (FGP - Analyst Report) with earnings ESP of +6.90% and a Zacks Rank #1 (Strong Buy).

W&T Offshore Inc. (WTI - Snapshot Report) with earnings ESP of +9.09% and a Zacks Rank #2 (Buy).

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