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Diamond Offshore Earnings Outshine

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Diamond Offshore Drilling Inc. (DO - Free Report) reported second quarter 2013 earnings of $1.33 per share, surpassing the Zacks Consensus Estimate of $1.26. The outperformance was mainly backed by lower contract drilling expenses and interest overhead. Also, the quarterly results increased 22% from the year-earlier earnings of $1.09 per share.
Total revenue in the quarter increased 2.7% year over year to $758.0 million but lagged the Zacks Consensus Estimate of $759.0 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). Both dividends are payable on Sep 3, 2013 to shareholders of record on Aug 6.
Operational Performance
In the second quarter, revenues from the Contract Drilling segment rose 2.6% year over year to approximately $744.9 million, mainly attributable to a 6.5% increase in total floaters revenue. These floaters accounted for 94.5% of the total quarterly contract drilling revenue, while jackups contributed 5.5%.
Ultra-Deepwater floaters recorded an average dayrate of $342,000 during the quarter, down from $354,000 in the year-earlier quarter. Deepwater floaters realized an average dayrate of $409,000 versus $372,000 in the year-ago quarter. Mid-water floaters recorded an average dayrate of $271,000, up from $262,000 in the year-earlier quarter. Jackup rigs’ dayrates averaged $88,000, down from $94,000 in the second quarter of 2012.
Rig utilization for Ultra-Deepwater floaters increased to 92% from 89% in the year-ago quarter. Utilization of Deepwater floaters increased to 99% from 83% in the year-ago quarter. Mid-water category rig utilization was 65% compared with 66% in the comparable quarter last year while jackup rig utilization increased to 74% from 49%.
As of Jun 30, 2013, Diamond Offshore had approximately $370.0 million in cash and cash equivalents, while long-term debt was $1,496.2 million. Debt-to-capitalization ratio at the end of the quarter was 24.2% (down from 24.4% in the preceding quarter).
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.
During the quarter, Diamond inked an agreement to build a semisubmersible, which has already been contracted by BP plc (BP - Free Report) . The rig will begin with operations in 2016.
We maintain a Zacks Rank #3  (short-term Hold rating) on Diamond  Offshore based on the volatile oil and gas price scenario as well as geopolitical risks associated with international operations.
However, there are other stocks in the oil and gas industry, like Gulfmark Offshore, Inc. (GLF - Free Report) and Dril-Quip, Inc. (DRQ - Free Report) , which appear more promising and carry a Zacks Rank #1 (Strong Buy).

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