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Diamond Offshore (DO)

Diamond Offshore (DO). Michael DeRenzo Jason Chan Paddy Gu Caleb Pierson. October 24, 2013. Agenda. Introduction Company Overview Macroeconomic Outlook Relevant Stock Market Prospects Financial Analysis Valuation Recommendation. Diamond Offshore in RCMP.

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Diamond Offshore (DO)

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  1. Diamond Offshore (DO) Michael DeRenzo Jason Chan Paddy Gu Caleb Pierson October 24, 2013

  2. Agenda • Introduction • Company Overview • Macroeconomic Outlook • Relevant Stock Market Prospects • Financial Analysis • Valuation • Recommendation

  3. Diamond Offshore in RCMP • February 2008: Purchased 100 shares at $122.82 per share • November 2008: Purchased 50 shares at $72.96 per share • April 2009: Sold a Sep. $80 call at $5.85; Bought a Sep. $60 put at $4.78 • September 2009: Sold 100 shares at $76.25 vs. exercise adjusted strike on short call • October 2010: Purchased 100 shares at $68.02 per share • Current share price: $63.23 • Accounts for 2.4878% of total portfolio value

  4. Company Overview Diamond Offshore Drilling • Found in 1989 and headquartered in Houston, Texas • Global offshore oil drilling contractor that serves independent oil and gas companies as well as government-owned oil companies • Operates Ultra-Deepwater, Deepwater, Mid-Water and Jack-up oil rigs • Loews Corp. currently holds a 50.42% stake • Insurance companies, investment managers, hedge funds and government pension sponsors hold a combined 49.35% stake • DO offers its oil rigs to 35 different customers • Major customers include Petróleo Brasileiro S.A. and OGX Petróleo e Gás Ltda. • Accounts for 26 and 5 percent of gross trade accounts respectively • Compared to competitors, DO has a relatively large customer base Source: Capital IQ, Form 10-Q 2Q 2013 Company Overview MacroOutlook Stock Market Prospects Financial Analysis Valuation

  5. Company Overview Management’s Outlook • Key factors that impact DO’s rigs operating results • Regulatory surveys and planned downtime • 7 rigs will undergo surveys during second half of 2013 • In total the 7 rigs will be out of service for approximately 670 days • Physical damage on rigs • Construction and capital upgrade projects • All of these factors impact the revenue earning days for each of the oil rigs, ultimately lowering the overall utilization rates and average daily revenue • Ultra-Deepwater and Deepwater Floater markets consists of highest utilization rates • This will result in overall increased competition within these markets Source: Form 10-Q 2Q 2013 Company Overview MacroOutlook Stock Market Prospects Financial Analysis Valuation

  6. Breakdown of Oil Rigs by Ocean Depth Source: Diamond Offshore, 2012. DiamondOffsore: Investors: Annual Reports and Proxy Statements. 2012. 21 Feb. 2013 http://investor.diamondoffshore.com/phoenix.zhtml?c=78110&p=irol-reportsandproxy Company Overview MacroOutlook Stock Market Prospects Financial Analysis Valuation

  7. Company Overview Breakdown Of DO Oil Rigs • DO recently increased total rig count to 45 • 38 floaters (Ultra-Deepwater, Deepwater, Mid-Water) and 7 Jack-ups • The newest rig is expected to be completed by Q1 2016 and has been contracted for use in Q3 2016 • As of 10/18/2013 global supply of oil rigs hit 814 • Marketed utilization rate of 95.1% • Source: IHS, . N.p.. Web. 29 Oct 2013. <http://www.ihs.com/products/oil-gas-information/drilling-data/weekly-rig-count.asp&xgt;. Company Overview MacroOutlook Stock Market Prospects Financial Analysis Valuation

  8. Macroeconomic Outlook Key External Drivers • Global price of crude oil • Supply, demand and overall volatility • Global GDP growth rate • BRIC nations and other emerging markets • Emerging markets are projected to drop from 5.5% in 2012 to 5% in 2013 • As emerging economies mature their GDP growth rates will continue to decline towards developed economies growth rates • Increase in manufacturing industries • Petrochemicals, plastics, power generation, utilities, etc. Source: IBIS World, The Conference Board Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  9. Projected Global Supply & Demand Of Oil Global Oil Production Global Oil Demand • Liquid fuels still remain the largest energy source • Liquid share of world energy consumption expected to fall from 34% (2010) to 28% (2040) Source: . N.p.. Web. 29 Oct 2013. <http://www.eia.gov/forecasts/ieo/more_highlights.cfm Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  10. Industry Overview Current Performance Industry Trends • Oil and Gas consumption is expected to expand moderately as global economic growth continues • Environmental concerns associated with deep-sea oil and gas drilling • Rising operating costs through compliance monitoring and longer lead times • Industry's revenue is forecast to grow at an annualized rate of 2.5% in the five years to 2018 to $5.1 trillion • Volatile prices prevail • BRIC demand • Deep-water Horizon Keys To Success • Ability to accommodate environmental requirements • Downstream ownership links • Output is sold under contract - incorporate long-term sales contracts • Control cost structure Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  11. Industry Life Cycle Mature • Industry contribution to US economy average at 1.4% per year • Lag the global economy’s GDP • Technological change tend to be incremental • Merger activity is ongoing Decline Maturity Introduction Growth Total Industry Revenue Time Source: IBIS World Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  12. Porter’s five forces Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  13. Industry Analysis – Oil & Gas Exploration & Drilling Revenue Revenue Growth • Expected revenue: $4.5 Trillions in 2013 • Up from $4.2 trillion in 2008 • Annualized growth rate of 1.3% from 2008 to 2013. • Revenue is expected to grow 3.0% in 2013 • Industry performance did experience significant pitfalls • Profit has fluctuated according to oil and gas prices. Source: U.S. Energy Information Administration (EIA)." U.S. Energy Information Administration (EIA). N.p., n.d. Web. 29 Oct. 2013. Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  14. Drilling Day Rates & Utilization Percentages Mid-Water Oil Rigs Deepwater & Ultra-Deepwater Oil Rigs • IHS Petrodata Day Rate Indices track drilling fleet day rates and utilization percentages • Day rates for Mid-Water Oil Rigs reached the highest level in October since the index’s inception in 1994 Source: "Day Rate Index | IHS." IHS Home Page. N.p., n.d. Web. 29 Oct. 2013. Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  15. Understanding Market Power Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  16. Financial Analysis - Ratios Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  17. Financial Analysis – Dupont Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  18. Recent Stock Performance 20 & 200 Day Moving Average Stock Chart • DO’s stock price has been well below the 200 day moving average since the end of July, 2013 • Currently the stock price is hovering right around the 20 day moving average and looks as if it may fall below the 20 day moving average in the near future Source: Yahoo Finance Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  19. Valuation – Utilization Rates

  20. Valuation – WACC Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  21. Capex Projections DO’s Capex growth rate based off of the average historical Capex of the Comparable Companies from FY2008 – FY2012

  22. Valuation – DCF 3.3% premium added due to business risks involved Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  23. Valuation – DCF Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  24. Valuation – Comparables Company Analysis Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  25. Comparables Stock Chart • From the start of the year (2013), DO’s stock price has been one of the lowest (Jan – May) and the lowest (May – Dec) among its competitors. Source: Yahoo Finance Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  26. Decision Drivers • Strengths • Positioned to take advantage of deep water and ultra-deep water opportunities with forthcoming drillships and semisubmersibles • Deepwater and ultra-deep water are the areas with the highest current utilization rate • Concerns • Slow down in emerging market GDP growth • Alternative sources of energy and oil • Large forthcoming capital expenditures for fleet maintenance/upgrade • Stock performance vs. comparables show poor performance • Highly competitive and cyclical industry Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  27. Recommendation • Valuation • Current Price $63.01 per share • Analyzed Price $58.67 per share based on Triangulation • Recommendation • SELL 150 shares @ MP Company Overview Macro Outlook Stock Market Prospects Financial Analysis Valuation

  28. Questions?

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