Diamond Offshore’s backlog: The strengths and weaknesses

Market Realist

A must-know investor's guide to Diamond Offshore Drilling (Part 5 of 8)

(Continued from Part 4)

Diamond Offshore’s emphasis on depth affects its backlog

Because 87% of Diamond Offshore’s (DO) in-service fleet comprises semisubmersible rigs, drillships and semisubmersible rigs are not distinguished from one another in the company’s backlog. Plus, because of DO’s focus on mid-water, deepwater, and ultra-deepwater emphasis, backlogs are broken down by drilling depth instead of rig type with the exception of jackups and shallow water drilling.

Why the backlog may provide a false sense of security

As reported in Diamond Offshore’s 2013 Q3 10-Q, the company maintained a recorded backlog of $7.35 billion. The remaining backlog of 2013 was subtracted from this figure, and this resulted in a total backlog of $6.69 billion. This gives Diamond Offshore the smallest backlog among the largest companies in the industry, both before and after the adjustment. Generally speaking, a larger backlog is always better since backlogs often indicate where future revenues for a company might be, and it can also serve as a measure of risk management in cases where contracts have been secured for future operations. However, the exact amount of stability is difficult to determine since Diamond Offshore includes both secured and expected contract values in its backlog. Additionally, it is worth noting that backlogs are a very common business practice due to the high costs associated with offshore drilling – management likes to plan ahead. Backlogs will also fluctuate in amount as contracts are acquired, fulfilled, or terminated.

In terms of LTM revenue (or last twelve month’s revenue), 2014’s backlog makes up 83% of LTM, 2015’s makes up 66.26%, and the 2016–2019 backlog makes up 77.2%. It’s safe to assume that the 77.2% is distributed at decreasing amounts per year between 2016 and 2019 because of the drop in percentage between 2014 and 2015. Given these figures, it becomes clear that in the short-term, the majority of Diamond Offshore’s future revenue should be fairly stable because of confirmed contracts as well as many more that are expected to follow through. While this projects a positive outlook for Diamond Offshore’s future revenue, investors must be cautious.  Customers do not always follow through with expected or confirmed contracts, and  Diamond Offshore cannot guarantee that these contracts will be fulfilled.

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