DO managing CAPEX in a capital intensive industry

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A must-know investor's guide to Diamond Offshore Drilling (Part 4 of 8)

(Continued from Part 3)

Capital intensity

Offshore contract drilling is highly capital intensive due to the amount of raw materials and time that go into the construction of rigs. Unlike many of its competitors who invest heavily in new build rigs to attract higher day rates and demand from customers, Diamond Offshore (DO) takes a lower cost approach. Essentially, Diamond Offshore will invest in retrofitting and reconstruction of older rigs to enhance their capabilities and to stay competitive in the market. However, the company will invest in new rigs when market prices are considered by management to be attractive and within reason. In return, this keeps capital expenditures relatively low overall, even when it invest in new rigs.

High capital expenditures/net fixed assets

In terms of absolute dollar amount, Diamond Offshore spends the least on capital expenditures compared to its competitors. As a percentage of net fixed assets, however, Diamond Offshore had the second-highest amount of capital expenditures in 2011 and the most relative to net fixed assets in 2012. First, capital expenditures did increase in 2011 and stayed constant in 2012 due to the construction of new drillships and semisubmersibles. Second, Diamond Offshore has the smallest fleet among the largest offshore drilling companies and the lowest number of net fixed assets. So, an increase in capital expenditures to purchase a new build would increase capital expenditure to net fixed asset by a larger amount compared to its peers.

Capital expenditures and fleet age

Each company reports ship age under different metrics and conditions. Specifically, Diamond Offshore will report a rig’s “year built” as its original year of completion unless the rig received upgrades that are so significant that they enable a rig to be classified under another floater category. Diamond offshore does not specify whether “new floater classification” refers to the generation of the rig’s technology or the drilling capabilities of a rig. It is widely open to interpretation, and investors should give some leeway when analyzing the fleet.

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