I have been bearish on Diamond Offshore (DO, Financial) in the last few months as I believe that the company is not among the best to consider exposure in a challenging market condition. The company released its fleet status report on Jan. 15 and the fleet status report backs my bearish outlook for the company in 2015. This article discusses the key negative points in the report.
Before talking about the fleet status, I must mention here that I don’t expect recovery in oil prices in the first half of 2015. The global economy is weakening and there is no supply cut from OPEC, even when non-OPEC production is likely to decline in the coming months. Therefore, the outlook for offshore drilling companies will remain very challenging over the next six months. Beyond a period of six months, it is too early to talk about the trend in oil prices. However, I believe that there will be no big recovery in oil prices in 2015.
Coming to the fleet status report for Diamond Offshore, the company has eight rigs in the Gulf of Mexico (United States) as of this month. However, the company has no contracts for three rigs and has a contract until September for another rig. For the remaining four rigs, the contract extends beyond 2015.
Clearly, the contract coverage is likely to be low for the rigs in GOM US for 2015. The three rigs that are not contracted are built in 1973, 1974 and 1997. Therefore, the rigs are oil and in challenging market conditions, it might be difficult to contract the rigs. However, the rig that is scheduled to go off-contract in September is a new rig and I believe that the will be contracted with relative ease.
In the GOM (Mexico), Diamond Offshore has five rigs and two rigs are scheduled to go off-contract in March and May respectively. The rigs are 1972 and 1976 built and therefore old rigs that will find it difficult to get contracted in the current market conditions. Even if the rig is contracted, the day rate is likely to be very low.
In the North Sea, Mediterranean and West Africa, Diamond Offshore has seven rigs with six rigs going off-contract in 2015. While one rig is going off-contract in December and will not have an impact on 2015 cash flows, the other five rigs can significantly impact the cash flow if the rigs are idle or contracted at a lower day rate. In my view, the probability of older rigs remaining idle is high and there are four rigs that are built before 1990. Therefore, the scenario is challenging for Diamond Offshore.
In Australia, Diamond Offshore has four rigs with two rigs going off-contract in 2015. In Brazil/South America, Diamond Offshore has nine rigs with four rigs going off-contract in 2015. Therefore, even in these regions, the company will need to market a high number of rigs in very challenging market conditions.
Diamond Offshore has already cold stacked three rigs and retired three more rigs, and I expect the company to cold stack more rigs in the next 3-6 months.
Therefore, the outlook for Diamond Offshore is certainly bearish for 2015 and I expect a meaningful decline in revenue, EBITDA and cash flows. Considering the current rig status, Diamond Offshore is a stock to avoid for the next two to three quarters.
