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Diamond Offshore's Free Cash Flow Potential Looks Promising

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On Aug 20, 2014, we issued an updated research report on Diamond Offshore Drilling Inc. (DO - Free Report) , a major contract driller, providing comprehensive offshore drilling services to the global energy industry.

The company’s second-quarter earnings surpassed the Zacks Consensus Estimate but revenues lagged the same. The results primarily benefited from higher dayrates. The company posted an earnings beat in all of the last four quarters with an average earnings surprise of 19%.

Diamond Offshore Drilling is believed to have solid fundamentals with significant free cash flow potential and a clean balance sheet, which enhances the possibility of further share buybacks and/or special dividends in the years ahead. As of Jun 30, 2014, Diamond Offshore Drilling had approximately $980.8 million in cash and cash equivalents, while long-term debt was $2,244.3 million.

The company is aiming to increase its footprint in the emerging markets (such as Brazil, Australia and West Africa) to reap benefits from the recent discoveries of deepwater fields. Again, a gradual improvement of the drilling market in the Gulf of Mexico (especially after the deepwater drilling ban was lifted), along with better bidding activity, will prove beneficial for a contract drilling company like Diamond Offshore.

Given oil’s strong long-term fundamentals, the long lead times of deepwater projects, and the limited slack in the global deepwater drilling fleet, we do not expect any significant impact on dayrates. As a premium deepwater drilling contractor, Diamond Offshore Drilling enjoys strong leverage to this relatively favorable outlook. Per the latest fleet status report, Ocean Princess and Ocean Onyx received contracts. These contracts indicate that there is still scope of work for older rigs.

However, Diamond Offshore Drilling expects delayed start-up of newbuilds, increased downtime for some of its rigs and higher operating costs in 2014, which will likely affect the company’s profitability. Further, Diamond Offshore Drilling’s decision to reclassify four cold-stacked rigs as held for sale is likely to restrict the capacity for upgrades as was in the case of Ocean Apex and Ocean Onyx.

Other Stocks to Consider

At present, Diamond Offshore Drilling carries a Zacks Rank #3 (Neutral). Better-ranked stocks in the same industry include Weatherford International plc (WFT - Free Report) , Sunoco Logistics Partners L.P and Sanchez Energy Corp (SN - Free Report) . All of these stocks sport a Zacks Rank #1 (Strong Buy).

In-Depth Zacks Research for the Tickers Above

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Weatherford International PLC (WFT) - free report >>

Diamond Offshore Drilling, Inc. (DO) - free report >>

Sanchez Energy Corporation (SN) - free report >>

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