Diamond Offshore Fleet Shows Customer Concentration
Diamond Offshore's 2Q15 Analysis Update
Hardest hit industries
Since mid-2014, oil prices have started to fall and have not yet rebounded. According to industry analysts, the prices are not expected to bounce back in the near future. The industries hardest hit by the plummeting oil prices are oil exploration and production (or E&P) and oil drilling companies. This includes onshore as well offshore companies (IYE) like Ensco (ESV), Noble Corp. (NE), Transocean (RIG), Atwood Oceanics (ATW), and Seadrill (SDRL).
Oil prices and E&P companies
As oil companies’ profits and cash flows are squeezed, this situation directly impacts their capital expenditure. E&P companies have almost cut their capital budgets by 40%–50% for this year, which drastically reduced the demand for offshore rigs.
In this situation, it will be interesting to identify the major customers of Diamond Offshore (DO) and how changes in their capital spending plans affected the company’s business.
Diamond Offshore’s fleet and customers
Diamond Offshore’s fleet consists of 35 rigs, out of which 22 are active, 11 are cold stacked, and two are actively marketed. The main customers of the company for the active rigs are Petrobras (PBR) and Petróleos Mexicanos (PEMEX).
Petrobras, which accounted for 32% of Diamond Offshore’s total 2014 revenue, has cut its long-term spending budget by 41%. This is in contrast to its previous five-year spending plan. Similarly, Pemex, which operates three of Diamond Offshore’s (DO) rigs, cut its capital expenditure for 2015 by 11%. These cuts have a negative impact on the company.
Canceled and negotiated contracts
In 1Q15, Petrobras (PBR) verbally announced the possibility of terminating one rig. In 2Q15, it terminated the drilling contract on the rig Ocean Baroness, which became effective from March 31, 2015. If this contract were not terminated, the company could have added approximately $408.4 million, which equals 4%–5% of its revenue in each year until 2018.
In 2Q15, PEMEX terminated the contract for the Ocean Nugget rig. If this contract had sailed smoothly, Diamond Offshore could have added $49 million to its revenues until 2016. PEMEX also negotiated contracts for Ocean Ambassador, Ocean Summit, and Ocean Scepter with Diamond Offshore (DO) at lower day rates.
Other smaller customers have also either canceled or renegotiated contracts, which has a negative impact on the revenue backlog of the company. We will discuss this in more detail in the next article.
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