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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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To: Dennis Roth who wrote (81)	6/13/2008 7:09:04 AM
From: Dennis Roth	of 111

Diamond Offshore Drilling (DO): Management meetings reaffirm positive fundamentals; Buy rated - Goldman Sachs - June 12, 2008 United States What's changed We recently hosted meetings with Diamond Offshore (DO) management. The meetings reaffirmed our Buy rating and bullish view of the deepwater market and Diamond's commitment to returning cash to shareholders. We are adjusting our estimates to reflect recent fleet status reports and higher dayrate assumptions for four of Diamond's 4th generation floaters that are available in 2009 ($500k/day vs. $465k/day previously). Implications (1) Deepwater dayrates are likely to remain strong despite fears of a downward move following Petrobras' plan to contract 40 newbuilds. We expect dayrates for deepwater rigs with near-term availability to increase due to: (a) decreasing availability and increasing lead times for newbuilds; and (b) higher long-dated oil prices, which have shown a strong correlation to dayrates, and rising newbuild construction costs. (2) We believe that there is an increasing possibility that Diamond adopts a more efficient capital structure by using debt to finance growth, maximize special dividends, and minimize taxes. (3) We see 100-150% upside to the special quarterly dividend in 2009 ($2.50 - $3.12 from $1.25) based on FCF estimates and believe that decisions to increase are likely to be made on an annual basis. Valuation We see 9% upside to our $145 12-month target based on 10X 09E DACF. Key risks Capacity additions, cost inflation and a severe correction in oil prices. Impact on related securities Positive data points in the deepwater market should bode well for Buy rated Transocean ($172 12-month target based on 11X 09E EV/DACF).

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