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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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To: Dennis Roth who wrote (60)	2/8/2008 8:37:23 AM
From: Dennis Roth	Read Replies (1) of 111

Diamond Offshore Drilling (DO): Sell-off provides buying opportunity - thesis still intact - Goldman Sachs - February 08, 2008 What's changed Adjusted 4Q2007 EPS of $1.61 was in line with our $1.61 estimate and below consensus of $1.68. We have lowered our 2008/09/10E EPS to $10.65/$12.62/$13.34 from $11.13/$13.30/$13.87 to reflect higher cost inflation and downtime. We have also lowered our 12-month price target to $136 from $140 based on 10.8X 2008E EV/DACF. Implications (1) Despite Diamond’s disappointing 4Q2007 results we are maintaining our Buy rating. We recommend investors take advantage of the weakness given DO’s favorable exposure to the floater market (87% of 2008E EBITDA) and commitment to returning cash to shareholders via special quarterly dividends – which we see upside to over time. (2) 2008 cost inflation guidance of 18%-19% is higher than most were expecting but we think this is an industry-wide issue and not isolated to Diamond. We expect operating cost inflation to remain a key issue throughout 4Q2007 earnings season which started with Noble issuing 2008 year-over-year cost inflation guidance of 20%-25%. On the positive side, DO is less exposed to cost inflation and downtime in 2009 relative to peers due a decline in the number of regularly scheduled 5-year surveys. (3) The Ocean Spur (300-IC) received a short-term contract in the Mediterranean that was roughly 15% below the previous market rate. We expect the dayrate spread between old less capable jackups and newbuilds to increase and ultimately put pressure on all international jackups – similar to the US land drilling market over the past 12 months. Valuation Diamond currently trades at 8.4X/6.4X 2008E EV-DACF/EV-EBITDA, a 7%/25% discount to RIG which trades at 9.0X/8.0X. Key risks Risks include (1) lower utilization and dayrates; (2) cost inflation; and (3) a severe correction in commodity prices.

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