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Will Diamond Offshore (DO) Disappoint in Q3?

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Leading oil and gas drilling contractor, Diamond Offshore Drilling Inc. (DO - Free Report) , is expected to report third quarter 2013 earnings on Thursday, Oct 24, before the opening bell. Let’s see how things are shaping up prior to the announcement.

In the last quarter, the company’s earnings of $1.33 per share increased 22% from $1.09 per share earned in the year-ago quarter. The outperformance was mainly backed by lower contract drilling expenses and interest overhead. The results also surpassed the Zacks Consensus Estimate of $1.26.

Factors to Consider This Past Quarter

We believe Diamond Offshore Drilling has solid fundamentals with significant free cash flow and a clean balance sheet that increase the possibility of further share buybacks and/or special dividends in the years ahead.

Diamond is aiming to increase its footprint in emerging markets (such as Brazil, Australia and West Africa) to reap benefits from the recent discoveries of deepwater fields. Again, the gradual improvement in the drilling market in the Gulf of Mexico (especially after the deepwater drilling ban was lifted), along with better bidding activity, will likely prove beneficial for contract drilling companies like Diamond Offshore. However, going forward, Diamond expects higher downtime and operating costs for the rest of 2013 that are likely to affect its profitability.

Further, the company's decision to reclassify four cold-stacked rigs as held for sale could restrict the capacity for upgrades as was in the case of Ocean Apex and Ocean Onyx.

Earnings Whispers?

Our proven model does not conclusively show that Diamond Offshore is likely to beat the Zacks Consensus Estimate in the third quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The earnings ESP for the stock is -0.86%.

Zacks Rank: Diamond Offshore’s Zacks Rank #4 (Sell) when combined with a -0.86% ESP indicates that Diamond Offshore is likely to miss the earnings estimate.

We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:  

Ocean Rig UDW Inc. , earnings ESP of +100.00% and a Zacks Rank #1 (Strong Buy).

Swift Energy Co. , earnings ESP of +31.25% and a Zacks Rank #1 (Strong Buy).

Stone Energy Corp. (SGY - Free Report) , earnings ESP of +6.76% and a Zacks Rank #1 (Strong Buy).


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