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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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From: Dennis Roth	10/26/2007 8:22:06 AM
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Diamond Offshore Drilling (DO): Continue to like DO shares, especially in light of new dividend policy - Goldman Sachs - October 26, 2007 What's changed We lowered our 2007E EPS to $6.63 from $6.84 primarily due to increased downtime and related costs. We also adjusted our 2008E/2009E EPS to $11.68/$14.07 from $12.25/$14.40. We increased our 12-month price target to $135 (10.0X 2008E EV/DACF) from $125. We believe a higher multiple is warranted due to the new dividend policy coupled with Diamond’s solid cash flow visibility through 2009. Implications (1) Conviction Buy-rated Diamond Offshore remains our favorite driller, especially in light of the new dividend policy. We believe total annual dividends paid in 2008/2009 could be roughly $8.00/$12.70 based on conservative estimates. If our pro forma 2009 total dividend payout of $12.70 is accurate, then the shares would be trading at a 10.8% yield currently and at a 9.4% yield based on our $135 12-month price target. We should also note that Diamond’s contract coverage supports a consistent special dividend, in our view, with 76%/53% of 2008/2009E revenues in backlog. (2) The midwater market remains strong and Diamond sees upside to dayrates for availability in 2008/2009. Diamond has considerable leverage to the mid-water water market (17 of Diamond’s 31 floaters have less than 3500’ water depth). Although Diamond has the 2nd highest revenue backlog of the offshore drillers, it has 7 mid-water floaters coming off contract in 2008-2009 giving it leverage to increasing dayrates. (3) While 4Q07 downtime was guided higher, it was not entirely unexpected and over 50% of the downtime is for mobilizations that position Diamond’s assets in better markets. Valuation Diamond currently trades at 8.7X/6.5X our 2008E EV-DACF/EV-EBITDA. Key risks (1) Capacity additions could result in lower utilization and dayrates; (2) cost inflation; and (3) a severe correction in commodity prices

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