Diamond Orders New Rig: Ocean Onyx

Diamond Offshore Drilling Inc (DO - Analyst Report) has recently awarded a contract to Singapore-based Keppel Offshore & Marine Ltd. for the construction of a moored semi-submersible rig valued at $300 million.

The rig will be named Ocean Onyx and is expected to be delivered by the third quarter of 2013. The company will use its available funds to bear the total cost of the construction that includes commissioning, spares and project management but excludes capitalized interest.

Ocean Onyx will be designed in a manner that it will be operational in water depths of up to 6,000 feet and will possess a variable deck load of 5,000 long tons. The rig – with an employee capacity of 140 – will also comprise a five-ram blowout preventer.

Ocean Onyx will be constructed at the Keppel AmFELS shipyard in Brownsville, Texas and will utilize an existing hull of Ocean Voyager, a cold stacked unit of Diamond Offshore. This would inevitably reduce the cost as well as the time required to construct the rig. Keppel will install advanced drilling equipments and sponsons to the pontoons to enhance the stability of the rig in deep water.

We expect the rig order to present significant opportunity for Diamond Offshore’s deepwater operations, as no new standard midwater and deepwater rigs are currently under construction. Ocean Onyx is expected to emerge as the perfect choice to meet the rising demand in this segment

Diamond Offshore’s solid contract backlog is expected to provide sound earnings and cash flow visibility going forward. This will be further strengthened by the company’s increasing focus on Brazil and the North Sea. A combination of upgrades and new construction has been the long-term strategy of the company and has allowed it to become a major player in the industry.

Houston-based Diamond Offshore holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. We maintain a Neutral recommendation on the stock for the long term. The company’s competitor Noble Corp. (NE - Analyst Report) is also updating its fleet and its expansion includes 8 drillships and 6 newbuilds under construction, with deliveries expected over the next three years.

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