Diamond Offshore Drilling Inc. (DO - Analyst Report) announced that it has awarded a newbuild contract for an ultra-deepwater drillship to Hyundai Heavy Industries Co. The contract is worth $610 million and represents the third under Hyundai.
Earlier in 2011, Diamond had placed orders for two similar drillships, Ocean BlackHawk and Ocean BlackHornet, which are currently under construction at the Hyundai yard. Delivery of the new drillship is scheduled for the second quarter of 2014 and the U.S. offshore driller intends to pay for the unit out of cash flow and available funds.
The latest newbuild will have similar specifications to the previously ordered ones, which comprise dynamic positioning capability with a seven ram blowout preventer, dual activity capability, five mud pumps and a maximum hook-load capacity of 1,250 tons. The units are designed to drill up to 12,000 feet of water.
Houston, Texas-based Diamond Offshore is a major contract driller, providing comprehensive offshore drilling services to the global energy industry. With the latest drillship order, the company will have eight rigs in its portfolio that are capable of drilling in waters depths of more than 10,000 feet.
The offshore drilling companies are seeking to capitalize on soaring oil prices, especially following the lifting of a deepwater drilling ban by the U.S. administration in the wake of last year’s oil spill disaster. Diamond is also targeting to increase its footprint in the emerging markets, like Brazil and West Africa, to capture the gradual uptrend of the drilling market in the Gulf of Mexico as well as crude oil prices. In the past two years, the company has added five ultra-deepwater ships.
Although we remain upbeat on Diamond Offshore’s long-term earnings growth visibility based on its strong leverage to the offshore deepwater drilling market, we are cautious due to a number of headwinds that all offshore drillers face, including the lack of pricing power as well as the lingering effects of the Gulf of Mexico drill ban and related U.S. policies.
The company, which competes with peers such as Transocean Ltd. (RIG - Analyst Report) and Noble Corporation (NE - Analyst Report), holds a Zacks #3 Rank (short-term Hold rating). Our long-term Neutral recommendation for the stock remains unchanged at this stage.