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Diamond Offshore Drilling Inc. Presented by Ben Hier & Brandon Lee February 26, 2008. Agenda. Company Overview Industry Outlook Competitors Portfolio Fit & Valuation Recommendation . Company Overview.

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diamond offshore drilling inc

Diamond Offshore Drilling Inc.

Presented by Ben Hier & Brandon Lee

February 26, 2008

agenda
Agenda
  • Company Overview
  • Industry Outlook
  • Competitors
  • Portfolio Fit & Valuation
  • Recommendation
company overview
Company Overview
  • Diamond Offshore Drilling Inc. is a leading global offshore oil & gas drilling contractor
  • Headquartered in Houston, Texas
  • Fleet of 46 offshore rigs
  • Strategy: “Economically Upgrade Fleet”
  • 51% Owned by Lowes Corp (NYSE: LTR)
  • NYSE Listed: DO

Ocean Endeavor

company history
Company History
  • (1953) First submersible offshore rig developed
    • Ocean Drilling & Exploration Co. formed (ODECO)
  • (1992) Diamond M Corp. purchased all of ODECO for $372M
  • (1993) Officially renamed Diamond Offshore Drilling Inc.
  • (1995) Lowes Corp. (LTR) sold 30% of Diamond Offshore in an IPO
    • Diamond Offshore listed on the NYSE: (DO)
  • (1996) Diamond acquired Arethusa (Offshore) Ltd.
    • Transaction reduced LTR’s ownership to 54%
    • Land division sold to DI Industries Inc.
  • (2008) Diamond is the world’s third largest offshore drilling contractor
managerial team
Managerial Team
  • James S. Tisch – CEO (1998-Present)
    • Mr. Tisch has served as CEO of Loews, a diversified holding company and Diamond’s controlling stockholder, since January 1999.
  • Lawrence R. Dickerson - President, COO, & Director (1998-Present)
    • Mr. Dickerson served on the United States Commission on Ocean Policy from 2001 to 2004.
  • Gary T. Krenek - Senior Vice President & CFO (2006-Present)
    • Mr. Krenek previously served as Vice President and CFO since March 1998.
business model
Business Model
  • Contracts obtained through competitive bidding
  • Receive a drilling “dayrate” for leasing fleet of offshore oil rigs regardless of results
  • Diamond pays the operating expenses
  • Some contracts have a performance bonus
investment thesis
Investment Thesis
  • Drillers have high barriers to entry with large capital investments
    • Cost to build a new floater ($440M, up over 400% since 1980)
  • Major E&P companies are facing declining reserves & must drill deep offshore for growth
    • Tupi oil & gas discovery 5-8 billion barrels of offshore reserves
  • Diamond has one of the largest supplies of midwater floaters, which are in short supply
  • International exposure buffers against more cyclical GOM drilling
    • 50% of revenues generated in ’07 came from international operations
  • Contract Drilling backlog provides cash flow & earnings visibility
    • $10.84B in contract drilling backlog
  • Well managed with a shareholder friendly dividend policy
    • Expected to payout 60-80% of net income in special dividends
investment risks
Volatility of energy prices

Reduced E&P expenditures

Oversupply of rigs

Decline in dayrates

Geopolitical risks

Early termination of contracts

Shortage of skilled labor

Weather

Investment Risks
the fleet focused on deepwater
The Fleet – Focused on Deepwater

Deepwater!

Semisubmersible

Drillship

Jack-up

*2006 10-K

**2007 8-K

backlog
Backlog
  • Total backlog as of February 7, 2008: $10.84B
agenda1
Agenda
  • Company Overview
  • Industry Outlook
  • Competitors
  • Portfolio Fit & Valuation
  • Recommendation
short term energy outlook
Short Term Energy Outlook
  • Over the next two years, an easing of prices is expected
  • $80 oil will support large offshore expenditures
  • Spot price of West Texas Intermediate (WTI) crude oil:
    • Averaged $72 per barrel in 2007
    • Averaged $93 per barrel in January 2008
    • Expected to average $87 in February 2008
    • Expected to average $86 per barrel in 2008
    • Expected to average $82 per barrel in 2009
  • World oil consumption is expected to grow by 1.4 million bbl/d in 2008
  • Non-OPEC supply in 2008 is projected to be slightly higher based on output growth from Brazil.
  • OPEC production will depend on the pace of consumption growth, inventory trends, and oil prices.
  • U.S. Production is projected to remained unchanged in 2008.

Source: Department of Energy

deep semi day rate index
Deep & Semi Day Rate Index
  • Deepwater markets continue to exhibit high utilization & tight supply
  • Bullish for Diamond Offshore

Source: http://www.ods-petrodata.com

jack up day rate index
Jack-up Day Rate Index
  • Diamond has (7 out of their 13 active) Jack-up rigs in the GOM
  • Management is actively bidding 3-4 of the 7 internationally
  • GOM Jack-ups account for less than 10% of revenue
  • GOM dayrates are stabilizing

Source: http://www.ods-petrodata.com

worldwide contract status expected demand
Worldwide Contract Status & Expected Demand

Source: Company Presentation 9/4/07

global offshore expenditures
Global Offshore Expenditures
  • Offshore Expenditures $193B (2006) to $248B (2010E)
  • Offshore drilling has more upside than traditional land drilling
agenda2
Agenda
  • Company Overview
  • Industry Outlook
  • Competitors
  • Portfolio Fit & Valuation
  • Recommendation
competitors
Competitors
  • Highly competitive industry
  • “Numerous industry participants, none of which…has a dominant market share”
  • Transocean (NYSE: RIG) operates 139 of the 1,202 offshore rigs worldwide
    • #1 Market Share
  • Diamond operates 46 offshore rigs
comparable valuation
Comparable Valuation

RIG-Transocean, NE-Noble, ATW-Atwood Oceanics

agenda3
Agenda
  • Company Overview
  • Industry Outlook
  • Competitors
  • Portfolio Fit & Valuation
  • Recommendation
slide27

Correlation to RCMP Holdings

Low Correlation To Holdings!

dcf assumptions
DCF Assumptions
  • Beta: 1.22
  • DCF WACC: 11.12%
  • Bloomberg WACC: 10.98%
  • Terminal Growth: 5%
dcf valuation
DCF Valuation
  • Current Price: $119.49
  • DCF Value: $135
  • Intrinsic Value: $122-$149
  • Estimated Special Dividend Yield: 5.6%
  • Estimated Total Return: 18%
multiple valuation conclusion
Multiple Valuation & Conclusion
  • Multiple valuation supports DCF analysis
  • DO provides portfolio diversification into energy & basic materials
  • Stock is 20% below its 52-week high (December 26, 2007)
  • Diamond Offshore is undervalued & should be bought

RIG-Transocean, NE-Noble, ATW-Atwood Oceanics

agenda4
Agenda
  • Company Overview
  • Industry Outlook
  • Competitors
  • Portfolio Fit & Valuation
  • Recommendation
recommendation
Recommendation
  • Purchase 100 shares of (DO) at the market
  • Approximate investment: $11,949
  • Diamond Offshore is the energy company to own!