A must-know investor's guide to Diamond Offshore Drilling (Part 7 of 8)
Why debt is crucial to the offshore drilling industry
As discussed in DO managing CAPEX in a capital intensive industry (Part 4), offshore drilling is a very capital intensive industry due to the cost of materials and labor that go into the production of rigs. Rig prices often run in hundreds of millions, and offshore drilling companies will often issue debt to cover the costs. As it was revealed in a past business overview on Noble Corporation (NE), companies often must raise debt in order to maintain their cash holdings during fleet expansion periods. This makes offshore drilling a highly levered industry overall.
How Diamond Offshore holds minimal debt
Compared to its competitors, Diamond Offshore has an astonishingly low amount of debt. The company has the highest current ratio—a measure of liquidity—at 4.25, meaning that current assets are 4.25 times greater than current liabilities. This is significantly higher than any of the current ratios for the competitors. Plus, Diamond Offshore has the lowest debt to total assets, net debt to total equity, and the lowest total debt to total equity ratios along with the lowest debt/EBITDA multiple.
This is all possible due to Diamond Offshore’s low-cost rig retrofitting and reconstruction strategy. Because the absolute amount of the company’s annual capital expenditures is almost always lower than its cash inflow from operating activities, it rarely issues debt to maintain the cash position—it sustains itself.
Because of this low-debt–low-cost strategy, Diamond Offshore is able to maintain the highest credit ratings among its peers.
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