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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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From: Dennis Roth	8/30/2007 7:41:21 AM
	of 111

DO - Diamond tends to shine in the fourth quarter - August 30, 2007 Goldman Sachs What's changed We met with Diamond’s management and came away with increased confidence in the outlook for the floater market and the possibility of the Board considering other dividend strategies to emphasize yield. We expect a special dividend in the $5.50-$6.00 range in 1Q2008 vs. our prior expectation of greater than $5.00. We are also lowering our 3Q 2007E EPS slightly to $1.38 to account for the recent fleet status report, US Gulf of Mexico weakness, and slightly higher shipyard time due to hurricanes. Our 12-month price target is unchanged at $119 (8.25X 08E EV/DACF). Implications Diamond shares have outperformed the OSX in the fourth quarters of 2005/06 by a meaningful margin (27%/18%) as investors began to anticipate the following quarter’s special dividend. We recommend investors Buy Diamond shares ahead of the potential 4Q rally, which is likely to start even earlier this year. Key takeaways from our meeting include: (1) Management appears to be frustrated with the current valuation and the Board is looking at ways to emphasize yield. While a change to the dividend policy is far from certain, the fact that management is looking at ways to address the valuation gap is positive in our view. (2) Management expressed a willingness to finance growth with debt (albeit minimal) in order to preserve future dividends. This should help calm yield oriented investors in the event Diamond announces an acquisition or newbuild, both of which we view as unlikely. Valuation Diamond trades at 7.2X / 5.3X our 2008E EV-DACF/EV-EBITDA, a 12%/26% discount to Transocean. Key risks Risks include: (1) capacity additions resulting in lower dayrates; (2) cost inflation and shipyard cost overruns; and (3) lower commodity prices.

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