The impact of fleet composition and rig placement on DO

Market Realist

A must-know investor's guide to Diamond Offshore Drilling (Part 3 of 8)

(Continued from Part 2)

Why Diamond Offshore is adding more drillships and semisubmersibles

Fleet diversification—both in fleet composition and global distribution—gives Diamond Offshore (DO) the ability to access a wide variety of reserves that a customer may have access or control over. Relative to its competitors, however, Diamond Offshore maintains a relatively semisubmersible homogeneous fleet. But this will change slightly as new build deliveries of its new ultra-deepwater drillships continue throughout 2014 and 2015, although the vast majority of the fleet will continue to be semisubmersibles. Two of the newbuild drillships have contracts with Anadarko, an American oil and gas exploration company, and two of the newbuild semisubmersibles are under contracts with BP and Apache. The third semisubmersible and the other two newbuild drillships are currently available for new contracts.

As shown in the chart above, Diamond Offshore maintains rig diversification across all major geographic segments of operation. While the company currently lacks exposure to the ultra-deepwater market in the U.S., this will change once the Ocean BlackHawk and the Ocean BlackHornet relocate to the U.S. Gulf of Mexico, adding further diversity to its global rig placement. Once the additional drillships are finished and relocated, Diamond Offshore will only lack exposure in the West African and the Persian Gulf jackup markets; however, this isn’t necessarily a problem, given the company’s push towards deeper drilling operations with higher day rates than shallow water drilling. Plus, growth in the shallow-water jackup market remains fairly flat compared to growth in deeper waters due to advancements in drilling technology.

Why improving fleet diversification is more important for revenue growth than competitive advantage

Given that the larger companies in the offshore drilling industry manage diversified global fleets of rigs, Diamond Offshore’s continued diversification is less of a measure of competitive advantage and more of a gauge of basic competitiveness and relevance in the industry. However, it is also important to realize that the company’s newest rigs under contract are generating some of the highest day rates among all rigs in the fleet. Both drillships contracted under Anadarko will be operating at day rates of $495,000, and the Ocean GreatWhite, contracted under BP, will operate at a day rate of $585,000 once delivered in 2016, according to the fleet status report. This may potentially alleviate Diamond Offshore’s lack of revenue growth over the past few years.

Continue to Part 4

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