A must-know investor's guide to Diamond Offshore Drilling (Part 6 of 8)
Why low cost doesn’t necessarily mean high profit
Diamond Offshore’s low-cost, deepwater-focused strategy doesn’t translate well in its financial performance when compared to its competitors in the industry. While all of the companies suffered a decline in revenue and margins following the Macondo incident in April of 2010 and recovered, Diamond Offshore continues to lag behind. Since 2009, the company has lacked growth in both revenue and EBITDA growth. On the other hand, all of Diamond Offshore’s competitors have seen growth in both over the same time span.
Plus, Diamond Offshore has also seen a decline in gross and operating margins over the same time span. In comparison, all of Diamond Offshore’s competitors have seen noticeable margin growth as of fiscal year 2012 in the aftermath of the Macondo incident. Clearly, a low-cost strategy does not necessarily equate to financial benefits among offshore drilling companies.
Macondo incident’s impact on the margins
The Macondo incident, also known as the BP oil spill of 2010, resulted in a sudden increase in restrictions of drilling permit issuings in the U.S. Gulf of Mexico. Revenue for companies in this region dropped significantly, but costs did not, resulting in an industry-wide decline in margins for 2010 and 2011. During the second half of 2011, drilling permits were being issued again, and the U.S. Gulf of Mexico operations resumed. For many companies, margins began to increase around this time.
Why Diamond Offshore has yet to recover
Diamond Offshore saw a decline in revenue between 2011 and 2012 because of fewer operating days as well as declining day rates, in both the mid-water and deepwater drilling segments. However, ultra-deepwater saw increases in both. Plus, the company had less revenue compared to previous years because of the decision to cold stack some rigs and to hold them for sale. It still pays some costs for the stacked rigs which further reduces margins since the stacked rigs do not generate revenue. Plus, Diamond Offshore’s jackup segment also saw a decrease in revenue from previous years, primarily due to the sale of three jackup rigs that operated in previous years.
Browse this series on Market Realist:
- Part 1 - An introduction to Diamond Offshore
- Part 2 - Must Know: A guide to Diamond Offshore’s fleet
- Part 3 - The impact of fleet composition and rig placement on DO
- Diamond Offshore Drilling