The added risk factors for Diamond Offshore

Market Realist

A must-know investor's guide to Diamond Offshore Drilling (Part 8 of 8)

(Continued from Part 7)

Small customer base

As of fiscal year 2012, about 45.8% of Diamond Offshore’s (DO) revenues came from contracts with two customers—Petrobras, Brazil’s state-owned oil company, and OGX Petroleo e Gas, which is one of Brazil’s largest private-sector integrated oil companies. Because of this, Diamond Offshore would be heavily impacted by any changes within the Brazilian economy, whether it would be greater economic expansion or an economic downturn. Plus, any reduction in oil demand throughout Brazil would likely lead to lower day rates as well as fewer operating days within Brazilian waters.

Foreign exchange risk

Due to its operations abroad, where the U.S. dollar is not the official currency, Diamond Offshore is exposed to risk from exchange rate fluctuations. While the company does hedge against fluctuations, they do not guarantee its success. Diamond Offshore currently has holdings in British pounds, Mexican pesos, Australian dollars, Norwegian kroner, and Brazilian real. For the past few years, the Brazilian real has been depreciating against the U.S. dollar due to factors largely influenced by civil unrest and government inaction in Brazil to both rising unemployment and rising inflation, and it may continue to depreciate against the U.S. dollar as the Federal Reserve continues tapering quantitative easing.

Confirmed backlog contracts may create drawbacks

All of the Diamond Offshore rigs currently under construction have either deepwater or ultra-deepwater capabilities. The ultra-deepwater market currently has high rig utilization and very limited availability, which is expected to put upward pressure on prices in the short-term. Despite this, the majority of Noble’s deepwater and ultra-deepwater fleets are under contract at fixed prices in the backlog. Because of this, Diamond Offshore may be unable to benefit from higher day rates.

Diamond Offshore’s backlog may not be completely fulfilled

Like many other companies in the offshore drilling industry, the backlog includes both confirmed contracts as well as expected contracts. Customers can always back out, so investors should also give some leeway when analyzing a company’s backlog.

Browse this series on Market Realist:

View Comments