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Diamond Offshore Drilling Inc. (DO - Analyst Report) reported adjusted second quarter 2012 earnings of $1.09 per share, beating the Zacks Consensus Estimate of 90 cents, mainly on account of higher day rates for the company's ultra-deepwater rigs. However, quarterly results decreased significantly from the year-earlier earnings of $1.92 per share.

Total revenue in the quarter decreased 17% year over year to $738.2 million, marginally missing the Zacks Consensus Estimate of $739 million.

Dividend Story

Diamond Offshore declared a 75 cent per share special dividend in the quarter, which remained unchanged from the prior quarter. The company will also pay its regular quarterly dividend of 12.5 cents per share (50 cents per share annualized).

Operational Performance

Revenue from the Contract Drilling segment declined 16.5% year over year to $726.2 million, mainly due to a 15.2% revenue decline in total floaters. These floaters accounted for nearly 94.5% of the total quarterly contract drilling revenue, while jackups contributed 5.5%.

Ultra-Deepwater floaters recorded an average dayrate of $354,000 during the quarter, up from $340,000 in the year-earlier quarter. Deepwater floaters realized an average dayrate of $372,000 versus $422,000 in the year-ago quarter. Mid-water floaters recorded an average dayrate of $262,000 during the quarter, down from $265,000 in the year-earlier quarter. Jackup rigs’ dayrates averaged $94,000, up from $82,000 in the second quarter of 2011.

Rig utilization for Ultra-Deepwater floaters decreased to 89% from 92% in the year-ago quarter. Utilization of Deepwater floaters dipped to 83% during the quarter from 98% in the year-ago quarter. Mid-water category rig utilization was 66%, down substantially from 77% in the comparable quarter last year, while jackup rig utilization decreased to 49% from 60% in the year-earlier quarter.

Financials

As of June 30, 2012, Diamond Offshore had approximately $376.4 million in cash and cash equivalents, while long-term debt stood at $1,495.9 million. The debt-to-capitalization ratio at the end of the quarter was 25.0% (down from about 25.4% in the preceding quarter).

Outlook

Houston, Texas-based Diamond Offshore exhibits long-term earnings growth visibility based on its strong leverage to the offshore deepwater drilling market. Additionally, the company’s significant free cash flow generation potential and healthy balance sheet enhances the possibility of further share buybacks and/or special dividends, going forward.

Diamond’s rival Noble Corporation (NE - Analyst Report) reported second quarter 2012 earnings of 59 cents per share, outpacing the Zacks Consensus Estimate of 57 cents, mainly on the back of solid demand for its wide range of rigs and vessels.

We maintain our long-term Neutral recommendation on Diamond Offshore shares, given the volatile oil and gas prices scenario as well as geopolitical risks associated with international operations. Diamond Offshore currently holds a Zacks #3 Rank (short-term Hold rating).
 

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