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Here's Why You Should Hold on to Diamond Offshore (DO) Now

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Diamond Offshore Drilling, Inc. (DO - Free Report) is well poised to grow on the back of its technologically advanced and versatile drilling fleet. However, conservative spending by explorers and producers is a persistent concern.

Houston, TX-based Diamond Offshore is a contract driller, providing comprehensive offshore drilling services to the global energy industry. The company’s rigs operate in the U.S. Gulf of Mexico, offshore Brazil in South America, Australia and Southeast Asia, incorporating countries like Malaysia, Indonesia, Myanmar and Vietnam.  Diamond Offshore also has operations in United Kingdom and Norway, East and West Africa, and the Mediterranean.

Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.

What’s Favoring the Stock?

Diamond Offshore’s technologically advanced and versatile drilling fleet enables it to stay ahead of its peers, as the company expects offshore rig demand to surge through 2025. Moreover, exclusive services provided by the company with innovative prowess, witnessed in Sim-StackTM, Helical riser buoyancy, Floating Factory Concept and elsewhere, generate robust demand for the same.  The company clinched awards for Ocean Valiant, Ocean Apex, Ocean Onyx and Ocean Monarch. Of these, Ocean Valiant will operate in U.K., while the other three will be working in Australia. The reactivation of Ocean Onyx will help the company to keep the number of active rigs at a satisfactory level. These contracts depict upstream companies’ high interest in Diamond Offshore’s fleet.

As of Jul 1, 2019, the company had a total contracted backlog of $2 billion that reflects more than 20 rig years of work. This not only reflects steady demand from customers but also offers an unmatched level of earnings and cash flow visibility. This enables Diamond Offshore to navigate through any business environment better than many of its peers. Additionally, cost-control initiatives of Diamond Offshore are promising. Last year, the company was able to lower total operating cost by more than 12% year over year.

Excellent financial health of the company is appreciable. Diamond Offshore has a debt-to-capital ratio of around 24.8%, which is much lower than 35.4% for the broader industry. Also, the company has total cash and cash equivalents (including marketable securities) of $147.5 million to support growth projects.

Downsides

However, there are a few factors that are impeding the growth of the stock lately.

Diamond Offshore is facing top-line pressure. The company’s revenues have been decreasing over the past eight years. While oil prices have improved over the last year, its revenues have failed to register a turnaround. In the trailing 12 months, the company’s revenues fell nearly 10.5%.

Explorers and producers kick-started 2019 with a conservative capital budget, as they witnessed massive crude downturn during the fourth quarter of 2018. Moreover, explorers are more bothered about bottom-line growth — being forced by investors following years of dull returns — than oil and gas production. Hence, conservative spending by explorers and producers is likely to hurt demand for offshore drilling, in turn hurting the company.

Diamond Offshore has expressed a concern regarding reduced EBITDA margin, as customers try to seal the deal at the ongoing rates for future works. Amid this scenario, the company would miss out on the recovery in dayrates in the market.

To Sum Up

Despite riding on significant growth prospects, top-line pressure and low dayrates are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.

Stocks to Consider

Some better-ranked stocks in the energy sector are given below:

NuStar Energy L.P. (NS - Free Report) is one of the largest independent liquids terminal and pipeline operators in the United States. Its third-quarter earnings per unit are expected to surge more than 100% year over year. It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

World Fuel Services Corporation (INT - Free Report) is an oil and gas refining and marketing company. The company beat estimates in the trailing four quarters, delivering average positive surprise of almost 16.4%. The company has a Zacks Rank #2 (Buy).

Dril-Quip, Inc. (DRQ - Free Report) is a provider of oilfield services for upstream energy companies. In the trailing four quarters, the company delivered average positive earnings surprise of almost 49%. It has a Zacks Rank #2.

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