Friday, April 25, 2014

Diamond Offshore Drilling: Good News for One, Good News for All

Diamond Offshore Drilling (DO) hit black gold with its earnings release today–and gave the beaten-down sector a boost, as Transocean (RIG), Seadrill (SDRL) and Noble Corp. (NE) all posted big gains.


Heading into today, it had been a tough, tough year for the offshore drillers as investors bet that the market for rigs would be weak. Transocean had lost 15% including reinvested dividends, while Noble Corp. had dropped 16%, Diamond Offshore had declined 13% and Seadrill, which one analyst had described as being in a bit of a pickle, had fallen 17%.

The came Diamond Offshore’s earnings. It reported a profit of 93 cents a share, beating analyst forecasts for 65 cents. Cowen’s J.B. Lowe explains how Diamond Offshore managed to beat expectations:

Contract drilling expenses were the main driver of earnings outperformance compared to our estimates; opex of $370 million was well below our $412 million estimate and guidance of $405-$425 million for the quarter. Diamond managed to record better-than-expected cost containment results across all segments of the floater market; in particular, deepwater expenses outperformed, at $72 million versus our $90 million forecast.

To top it off, Diamond Offshore also announced that it would pay a special cash dividend of 75 cents a share and some new short-term contracts for some of its drill fleet.  “We believe the beat combined with a slightly positive fleet status report and the announcement that the company has actively been repurchasing shares should result in shares trading higher,” Wunderlich Securities analyst Todd Scholl said in a report released before the open.

Trading higher might be an understatement. Shares of Diamond Offshore have gained 9.2% to $53 at 1:50 p.m. today–and cut its year-to-date price drop to just 6.9%. Diamond Offshore’s earnings also boosted the shares of Transocean, which has risen 4.3% to $43.21, Seadrill, which has advanced 3.5% to $34.15 and Noble Corp., which is up 2.7% at $31.79.

That’s what happens when an unloved sector finally gets some good news.

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