Diamond Reports Mixed 3Q, Lags Y/Y

Diamond Offshore Drilling Inc. ( DO - Analyst Report ) reported third quarter 2012 earnings of $1.28 per share, down 31% from the year-earlier earnings of $1.85 per share. However, the quarterly results comfortably beat the Zacks Consensus Estimate of $1.01.

Total revenue in the quarter decreased 17% year over year to $729.0 million, missing the Zacks Consensus Estimate of $736.0 million. The decline was mainly due to lower deepwater rig utilization.

Dividend Story

Diamond Offshore declared a special dividend of 75 cents per share in the quarter, 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 17.1% year over year to $714.0 million, mainly due to a 16.7% decline in total floaters revenue. These floaters accounted for nearly 95.1% of the total quarterly contract drilling revenue, while jackups contributed 4.9%.

Ultra-Deepwater floaters recorded an average dayrate of $354,000 during the quarter, up from $336,000 in the year-earlier quarter. Deepwater floaters realized an average dayrate of $373,000 versus $465,000 in the year-ago quarter. Mid-water floaters recorded an average dayrate of $258,000 during the quarter, down from $268,000 in the year-earlier quarter. Jackup rigs’ dayrates averaged $98,000, up from $84,000 in the third quarter of 2011.

Rig utilization for Ultra-Deepwater floaters decreased to 75% from 88% in the year-ago quarter. Utilization of Deepwater floaters dipped to 95% during the quarter from 99% in the year-ago quarter. Mid-water category rig utilization was 71% compared with 70% in the comparable quarter last year while jackup rig utilization increased to 56% from 44% in the year-earlier quarter.

Financials

As of September 30, 2012, Diamond Offshore had approximately $316.6 million in cash and cash equivalents, while long-term debt stood at $1,496.0 million. Debt-to-capitalization ratio at the end of the quarter was 24.8% (down from about 25.0% 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 third quarter 2012 earnings of 45 cents per share, failing to meet the Zacks Consensus Estimate of 50 cents, mainly due to extended downtime from rigs in the Gulf of Mexico (GoM) and offshore Brazil.

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 maintains a Zacks #3 Rank (short-term Hold rating).