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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (35)	12/19/2007 8:31:54 AM
From: Dennis Roth	Read Replies (1) \| Respond to of 111

Diamond Offshore Drilling (DO): Removing DO from the Conviction Buy List; maintain Buy rating - Goldman Sachs - December 19, 2007 What happened We are removing Diamond Offshore from the Americas Conviction Buy List but continue to rate the stock Buy relative to our Neutral coverage view. Diamond Offshore was added to the Conviction Buy List on February 21, 2007. Since being added to the List, Diamond shares are up 59.3% versus a 44.9% gain in the OSX (Oil Service Index) and a 0.2% decrease in the S&P 500. Over the last 12 months, Diamond shares are +55.4% versus +2.3% for the S&P 500. We are also revising our 2007/2008/2009E EPS estimates to $6.56/$11.59/$13.59 from $6.63/$11.68/$14.07 to reflect changes in recent fleet status reports. Current view We continue to rate Diamond Offshore Buy due to its favorable exposure to the floater market (82% of 2008E EBITDA) and commitment to returning cash to shareholders via special quarterly dividends. We view Diamond’s recent contracts with Petrobras for four semisubmersibles extending into 2015 at near leading-edge rates as representative of the longer-term demand for floaters. We believe that the floater market will remain undersupplied through 2010 at least and expect dayrates to remain at current levels with potential upside for near-term availability. Diamond’s contract coverage supports a consistent special dividend, in our view, with 82%/60% of 2008/2009E revenues in backlog and we also see upside potential to Diamond’s “special” quarterly dividend of $1.25 over time. We are raising our 12-month price target to $140 (from $132) based on a 10.5X 2008E EV/DACF (from 9.8X previously). We believe a higher multiple is warranted given the recent growth and duration of Diamond’s backlog. DO currently trades at 9.4X/8.1X 2008/2009E EV-DACF vs. RIG (adjusted for amortization revenue) at 9.6X/8.0X. The removal of DO from the Conviction Buy List is more a function of seeing greater upside elsewhere in the group. Further, some of Diamond’s near-term catalysts have occurred. Risks include: (1) Capacity additions, (2) cost inflation; and (3) a severe correction in commodity prices.