Diamond Offshore Drilling (DO): Fundamental story still intact - maintain Buy - Goldman Sachs - April 25, 2008
What's changed
Diamond Offshore reported 1Q2008 EPS of $2.09, below our $2.13 estimate and consensus of $2.12. We lower our 2008 EPS by 3% to $10.07 and raise our 2009E EPS by 1% to $12.36 to reflect recent fleet status reports. Our 12-month price target of $145 is unchanged (10X 2009E DACF).
Implications
(1) We maintain our Buy rating on DO. We like 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. DO has $663 mn of cash on the balance sheet, only $507 mn of debt and a 2008/09E FCF yield of 5%/9%.
(2) DO appears to be more open to growing its deepwater fleet through acquisitions. We are comfortable with management’s track record of discipline and believe that debt would be used to preserve the dividends.
(3) While 1Q08 costs were above expectations (partially due to unfavorable currency fluctuations), management confirmed 2008 cost inflation guidance of 18%-20% - in line with our expectation.
(3) The international jackup market is showing further signs of softening with the newbuild (Shield) receiving a 5 month contract for $175,000/day – 15%-20% below the peak. We maintain our cautious view of the international jackup market, which represents only 9% of DO’s 2008E EBITDA.
(4) DO secured a 2 year contract for the Guardian (1,500’ semi) in the North Sea at $385,000/day, which was above our expectation of $360,000/day.
Guidance for midwater rates in the US Gulf of Mexico appears to be low and we see upside to the $250,000-$300,000/day range given on the call.
Valuation
Diamond currently trades at 9.1X/6.8X 2009E EV-DACF/EV-EBITDA, a 2%/18% discount to RIG which trades at 9.3X/8.3X.
Key risks
Risks include capacity additions or a decline in commodity prices. |
