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Diamond Offshore Drilling, Inc. (DO - Analyst Report) has inked an agreement with an affiliate of Hercules Offshore, Inc. (HERO - Snapshot Report) to sell its jackup drilling rig − Ocean Columbia. The company expects to close the transaction in May 2012 but is yet to receive customary closing approvals.

Hercules will pay $40 million in cash for Ocean Columbia − the LeTourneau Class 82 SD-C designed drilling rig, and also has plans to employ it for Saudi Aramco under a three-year drilling pact. Per the drilling contract, Hercules will spend an additional $45 million for repairs, improvements and other contract specific refurbishments, along with mobilization from the Gulf of Mexico (GoM) to Saudi Arabia.

Four jackup rigs of Diamond are currently in an inoperative state in the U.S. Gulf, while another four are currently working in Mexico for Pemex. Upon divestiture, Diamond will be completely bereft of any operational jackup rig in the GoM.

As per the most recent fleet status report of Diamond, Ocean Columbia − with a dayrate of $62,500 for the drilling of three wells − is contracted to Marlin Energy from mid-February to early May 2012.

Diamond Offshore is a major contract driller, providing comprehensive offshore drilling services to the global energy industry. We like the company’s financial discipline, which makes it one of the best-capitalized companies in the industry.

The company is aiming to increase its footprint in emerging markets (like Brazil and West Africa) to reap benefits from the recent discoveries of deepwater fields. It exhibits long-term earnings growth visibility based on its strong leverage to the offshore deepwater drilling market. A gradually improving regulatory environment in the GoM region is expected to drive the performance of Diamond’s domestic fleet.

We maintain a long-term Neutral recommendation for the company, which competes with Noble Corporation (NE - Analyst Report). Diamond currently retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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