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Diamond Offshore Drilling Inc.

Diamond Offshore Drilling Inc. Han Yang Xuhao Yang Ryo Seob Kim Jionghan Dai Tyler Haida October 27, 2011. Analysts:. Agenda. Industry Analysis Competitors Company Overview Company Performance Valuation Recommendation. Holdings History. February 2008 Purchased 100 shares @ $122.82

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Diamond Offshore Drilling Inc.

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  1. Diamond Offshore Drilling Inc. Han Yang Xuhao Yang Ryo Seob Kim Jionghan Dai Tyler Haida October 27, 2011 Analysts:

  2. Agenda • Industry Analysis • Competitors • Company Overview • Company Performance • Valuation • Recommendation

  3. Holdings History • February 2008 • Purchased 100 shares @ $122.82 • November 2008 • Purchased 50 shares @ @72.96 • April 2009 • Sold a Sep. $80 call @$5.85 • Bought a Sep. $60 put @$4.78 • September 2009 • Sold 100 shares @ $76.25 vs. exercise adjusted strike on short call • October 2010 • Purchased 100 shares @ $68.02 • March 2011 • Recommendation to sell 50 shares @ $80 limit NOT APPROVED

  4. Holdings Continued • On Wednesday October 26, 2011 • DO closed @ $65.15 • Currently hold 150 shares • Currently DO holdings are 2.86% of total portfolio holdings.

  5. Industry • Demand is driven by oil and gas prices • Offshore drilling requires specialized equipment such as drill ships, semi-submersible rigs, “jack-up” rigs • Deepwater drilling is expect increase in the next few years • Large oil and gas field services companies typically do their business internationally

  6. Competitor • Transocean (RIG) • Largest offshore drilling firm ($18 B market cap) • Noble Corporation (NE) - Swiss offshore firm ($9 B market cap) • Ensco PLC (ESV) - Founded in 1975 in British ($11.9 B market cap)

  7. Fleet Comparison Competitor Source: DO, RIG, NE, EVS 2010 annual report

  8. Revenue distribution comparison Competitor Source: bloomberg

  9. Performance comparison Competitor Source: yahoo finance

  10. Company Overview • Diamond Offshore Drilling, Inc.is a leading deepwater drilling contractor, owns and operates one of the largest fleets of offshore drilling units in the world. The company's diverse fleet consists of 32 semisubmersibles, 13 jack-ups and four dynamically positioned drillships, three of which are on order with delivery expected in 2013 and 2014 • We provide offshore drilling services to a customer base that includes major independent oil and gas companies and government-owned oil companies. source : http://www.diamondoffshore.com/

  11. Global Presence

  12. Global Presence Source: DO 2010 Annual Report

  13. The Fleet • Jack-upSemisubmersible Drillship Drilling ship Source: http://www.boemre.gov/tarprojectcategories/structur.htm

  14. Jack-up • Jack-ups rigs are mobile, self-elevating drilling platforms equipped with legs that are lowered to the ocean floor until a foundation is established to support the drilling platform. • Used for drilling in water depths from 20 feet to 350 feet. • Currently have 13 jack-up drilling rigs Source: http://www.offshore-technology.com/projects/goldeneye/goldeneye4.html

  15. Semisubmersible • Semisubmersible operate in a “semi-submerged”position, remaining afloat, off bottom, typically anchored in position and remain stable for drilling in the semi-submerged floating position • High-specification semisubmersibles are generally capable of working in water depths of 4,000 feet or greater or in harsh environments • Intermediate semisubmersibles generally work in maximum water depths up to 4,000 feet • Currently have 32 semisubmersibles Source: http://www.glossary.oilfield.slb.com/DisplayImage.cfm?ID=639

  16. Drillship • Typically self-propelled, positioned over a drill site through the use of either an anchoring system or a dynamic-positioning system similar to those used on certain semisubmersible rigs. • Capable of working in water depths as deep as 12,000 feet • Currently have one high-specification drillship, the Ocean Clipper. • Three drillships under construction, BlackHawk and BlackHornet will be delivered in 2013 while BlackRhino in 2014.The former two have already signed contracts with Anadarko with day rates of 495K/day and total backlog of 1.8 billion Source: http://www.diamondoffshore.com/

  17. Business model and Revenue drivers Day rate Contracts Revenue Drivers Day rate: the rate that DO charges an operator for each day over contract period for the utilization of rigs Utilization rate:the actual percentage of time in a year a rig is utilized • Our contracts to provide offshore drilling services vary in terms and provisions. We typically obtain our contracts through competitive bidding • Guaranteed a fixed day rate basis regardless of whether or not such drilling results in a productive well Source: DO 2010 Annual Report

  18. Trends of Revenue Drivers Source: DO 10Q from 2004 to 2011

  19. Aging Problem of Fleet DO’s fleet is actually the oldest in offshore drilling industry with an average age of 32 years. Source: http://www.rigzone.com/news/article.asp?a_id=48839

  20. Negative result of fleet aging • The upgrade of fleet would cost several billions, it would prevent the fleet from becoming outdated and help create long-term value. Rather than hoard cash for potential rig-buying opportunities at the bottom of the cycle, Diamond has been paying out its excess capital to shareholders in the form of special dividends, which is 0.75 dollars per quarter • The substantial increase in activity is placing tremendous stress on the industry's aging rig fleet. Diamond has been slower than its peers in upgrading its fleet and ordering new rigs to handle rich ultra-deep-water contracts. • Diamond will have higher maintenance expenditures than peers' in the next few years. • Once current contracts expire, Diamond's old rigs will be competing with peers' upgraded and ultra deep-water rigs for lucrative contracts. We think customers will pay more to retain peers' rigs for challenging jobs, which will leave Diamond with lower fleet-utilization and day rates. Ultimately, Diamond's profitability would be severely damaged.

  21. ROE Analysis

  22. Multiple – P/E Source: Capital IQ

  23. Multiple – P/E • Correlation between price and earnings • Investors responded to BP oil spill • Price was driven by the market in the pass year Source: Capital IQ Source: Yahoo Finance

  24. Multiple – P/E • DO is among the top before the oil spill incident • Recent soar in P/E is not “healthy” • Stock price went down • Earning decreased even more • Use 5-year average Source: Capital IQ

  25. Multiple – P/E In the coming years • Market shows optimism on Euro debt issue • Industry average P/E is 11.23 for the past 5 year • DO reported increase in third quarter earning • DO was among the top before the oil spill incident • P/E may rise, but we do not expect P/E to jump over historical high • Use P/E = 10 for projection • Estimated Price is $90.60

  26. Multiple – P/S Price v.s. Earning Price v.s. Sales Source: Capital IQ

  27. Multiple – P/S • Net margin now is lower than it was from 2006 to 2009 • P/S was 2.63 on Oct. 24, 2011 • We do not expect a great raise in P/S • Use P/S = 2.8 for projection • Estimated Price is 67.12

  28. Multiple – P/BV Source: Capital IQ

  29. Recommendation Recommendation: Hold for now

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