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Here's Why You Should Retain Diamond Offshore (DO) Stock Now

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Diamond Offshore Drilling, Inc. (DO - Free Report) is well poised to grow on the back of 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 that provides 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 the 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 in markets that are expected to witness a surge in offshore rig demand through 2025. Moreover, the company experiences robust demand for exclusive services provided with innovative prowess, as is witnessed in Sim-StackTM, Helical riser buoyancy, Floating Factory Concept and others.  Notably, Diamond Offshore has clinched awards for Ocean Valiant, Ocean Apex, Ocean Onyx and Ocean Monarch. Of these, Ocean Valiant will operate in the 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 show 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. Further, 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.

Its excellent financial health is appreciable. Diamond Offshore has a debt-to-capital ratio of around 24.8%, which is much lower than 41.9% 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 holding the stock back.

Diamond Offshore is facing pressure on the top line. The company’s revenues have been decreasing over the past eight years. While oil prices have improved over the last year, revenues have failed to register a positive change. In the trailing 12 months, its 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 also expressed concern regarding reduced EBITDA margin, as customers try to seal the deal at the ongoing rates for future works. Under this scenario, the company would miss out on the recovery in dayrates in the markets served.

To Sum Up

Despite significant prospects, top-line pressure and conservative upstream spending are concerns for Diamond Offshore. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.

Stocks to Consider

Some better-ranked players in the energy space are Shell Midstream Partners, L.P. (SHLX - Free Report) , TC PipeLines, LP (TCP - Free Report) and NuStar Energy L.P. (NS - Free Report) . While Shell Midstream sports a Zacks Rank #1 (Strong Buy), TC PipeLines and NuStar Energy have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shell Midstream’s 2019 earnings per share estimates have increased from $1.52 to $1.59 in the past 60-day period.

TC PipeLines beat earnings estimates thrice in the last four quarters, with an average positive surprise of 12.6%.

NuStar Energy’s third-quarter 2019 earnings per share are expected to gain more than 107% year over year.

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