Diamond Beats Overall

Diamond Offshore Drilling Inc. (DO - Analyst Report) reported fourth quarter 2012 earnings of $1.12 per share, surpassing the Zacks Consensus Estimate of $1.10. The outperformance was mainly backed by higher ultra deepwater and jackup rig utilization. However, the quarterly results decreased 17.6% from the year-earlier earnings of $1.36 per share.

For full-year 2012, the company registered earnings of $5.18 per share, comfortably beating the Zacks Consensus Estimate of $4.67 per share but decreasing 25.1% from the year-earlier earnings of $6.92 per share.

Total revenue in the quarter increased marginally by 0.3% year over year to $750.5 million, beating the Zacks Consensus Estimate of $737.0 million. In 2012, total revenue decreased 10.1% year over year to $2,986.5 million. However, total revenue beat the Zacks Consensus Estimate of $2,969 million.

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

In the fourth quarter, revenue from the Contract Drilling segment inched up 0.9% year over year to $740.6 million, mainly due to a 1.4% increase in total floaters revenue. These floaters accounted for 94.7% of the total quarterly contract drilling revenue, while jackups contributed 5.3%.

Ultra-Deepwater floaters recorded an average dayrate of $348,000 during the quarter, down from $356,000 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 $268,000, down from $271,000 in the year-earlier quarter. Jackup rigs’ dayrates averaged $85,000, up from $79,000 in the fourth quarter of 2011.

Rig utilization for Ultra-Deepwater floaters increased to 89% from 70% in the year-ago quarter. Utilization of Deepwater floaters dropped to 85% during the quarter from 97% in the year-ago quarter. Mid-water category rig utilization was 70% compared with 60% in the comparable quarter last year while jackup rig utilization increased to 71% from 36%.

Financials

As of Dec 31, 2012, Diamond Offshore had approximately $335.4 million in cash and cash equivalents, while long-term debt stood at $1,496.1 million. Debt-to-capitalization ratio at the end of the quarter was 24.6% (down from about 24.8% 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 fourth quarter 2012 earnings of 50 cents per share, failing to meet the Zacks Consensus Estimate of 62 cents, mainly due to the extended downtime in the deepwater.

However, given the volatile oil and gas price scenario as well as geopolitical risks associated with international operations, we maintain a Zacks #3 Rank (short-term Hold rating) on Diamond Offshore. Total SA (TOT - Analyst Report) and Cabot Oil & Gas Corp (COG - Analyst Report) are other oil and gas stocks, carrying a Zacks Rank #1 (Strong Buy) and thus expected to perform better over the next one to three months.