Diamond Offshore Drilling Inc. November 12, 2009 Antoine Berger Gagan Ashok Bhatia Somil Kadakia Victor Murthi Kuralay Seitalina Prashant Tiwari
Presentation Agenda 1. 2. 3. 4. 5. Company Overview i. iii. iv. Brief History Business Model Porter’s Five Forces Management Quality and Outlook i. ii. Ratio Analysis Comps Assessment i. ii. Return and Risk WACC i. iii. DCF Valuation Relative Valuation Sensitivity and Scenario Evaluation i. ii. Current Holdings Suggestion Financial Analysis Quantitative Analysis Fundamental Analysis Recommendation Fall 2009 Diamond Offshore Drilling Inc. 2
COMPANY OVERVIEW Fall 2009 Diamond Offshore Drilling Inc. 3
Brief History • The predecessor companies: – ODECO May 1953, when Alden J. (Doc) Laborde founded Ocean Drilling and Exploration Co. (ODECO) in New Orleans. Laborde had designed what was probably the first submersible drilling rig. – Zapata An oil exploration company formed in West Texas in the early 1950 s by a partnership of young entrepreneurs, including George H. W. Bush (the 41 st U. S. President), John Overbey, J. Hugh Liedtke, and his brother William (Bill) Liedtke. – Diamond M In the early 1960 s, an onshore drilling company, Brewster. Bartle, went bankrupt. The banks that had become the owners of the company’s rigs contacted Don Mc. Mahon, a Texas rancher and oil man, and asked him to take over the failed company. Mc. Mahon accepted the challenge and formed Diamond M Drilling Co. in 1964. Fall 2009 Diamond Offshore Drilling Inc. 4
Brief History (Cont. ) • Putting together the pieces: – After the oil collapse of the 1980 s, Diamond M was fighting bankruptcy. Loews Corp. approached Diamond M’s president in 1989 with an offer to buy a rig. – In an opportunistic transaction in 1992, Diamond M Corporation, under Loews' ownership, purchased all of the outstanding stock of ODECO Drilling Inc. from ODECO Oil and Gas Co. Through the transaction, Diamond M acquired a total of 39 rigs. Shortly thereafter, Diamond M Corp. briefly changed its name to Diamond M-ODECO Drilling Inc. before becoming Diamond Offshore Drilling, Inc. , in 1993. – Until October 1995, Diamond Offshore remained a wholly owned subsidiary of Loews Corp. Then Loews sold 30 percent of the company in an initial public offering, and Diamond Offshore began trading on the New York Stock Exchange under the ticker symbol “DO. ” – In April 1996, Diamond Offshore acquired Arethusa (Offshore) Ltd. (including eight semisubmersibles and three jack-up rigs) with stock, reducing Loews’ ownership in the company to 54 percent. Fall 2009 Diamond Offshore Drilling Inc. 5
Business Model • Diamond Offshore’s job is to drill and complete wells at the direction of customers – Completion in industry terms means preparing the well for production • Rigs come with a full crew and the equipment and supplies needed to carry out the assigned task – May range from a few days to multiple years – Crews live on rigs for 14 days, then get 14 days off Fall 2009 Diamond Offshore Drilling Inc. 6
Oil Drilling is a Key Part in the Extraction of Offshore Oil Exploration Fall 2009 Oil Drilling Diamond Offshore Drilling Inc. Oil Extraction 7
Depending on the Depth of the Sea Various Oil Drilling Platforms are Used 0 ft 400 ft 1500 ft 4000 ft 10000 ft Revenue generated Current demand Fall 2009 Diamond Offshore Drilling Inc. 8
How are revenue Generated in the Oil Drilling Industry • The oil drillers obtain contract from the oil extracting companies through a bidding process. The price is the key element even if starting time and accident track record are also important. • According to the contract the oil driller will be paid a fixed dayrate when executing the contract. This dayrate is generally decide when the contract is signed. Fall 2009 Diamond Offshore Drilling Inc. 9
Business Model (Cont. ) • Contracts obtained through competitive bidding. Rigs are also auctioned for services • 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 • Some of the risks associated with DO i]Shortage of skilled workers ii] Possibility of early termination of contracts iii] Risks related to foreign operations. Exchange rate risks iv] Need to be at the right place at the right time Fall 2009 Diamond Offshore Drilling Inc. 10
Key Resources The people The crews: Oil drilling is a technically demanding industry and DO can cash in on experienced worker. The managment: see further slides Fall 2009 Diamond Offshore Drilling Inc. 11
DO Operates in a Cyclical Industry Theoritical representation of the cycle experience by oil drillers • • • Oil price is very volatile and directly influenced the demand priced pay for oil drilling However there is a limit to the rate of contracted drills (100%). There is also an oil price level that makes the exploration unprofitable (35$? ) and might result in very few drilling operations. The repercution of oil price moves on the average price paid per day for an oil drilling platform is smoothen by the fact that, contract already in progress and those already signed, are done for a price agreed at the time of signature Fall 2009 Diamond Offshore Drilling Inc. 12
Assets Type and proportion of rigs Revenue Split As we can see going ahead ‘Deepwater’ is going to be the driver of growth. Fall 2009 Diamond Offshore Drilling Inc. 13
Geographic Allocation DO is relatively well diversified in terms of allocation of its resources, its present in more than 15 countries and has more than 32 companies as its clients, this enables it combat the firm specific risk. Approximately 55% of our assets are located in GOM, Brazil. The potential of “level of oil and gas exploration activity” in GOM, Brazil becomes very important for DO, hence we have a look at those region in particular. . Fall 2009 Diamond Offshore Drilling Inc. 14
Prospects of Our Major Location Brazil & GOM Brazil • • GOM Pre-sals: Officials believe that in all, there may be up to 50 billion barrels of oil and gas offshore Important points Currently DO has about 10 contracts for submersibles /jack ups with Petrobas and about 4 with other firm(OGX) in Brazil. The state will inject the monetary equivalent of 5 billion barrels of oil into Petrobras. Important point: The pre sals are very complex to drill, therefore the expertise of DO will give them a competitive advantage over any other naïve firms. • • There are two important points 1: 23 out of 32 biggest fields are in decline in GOM 2: There are potentially 50 Billion barrels of oil in the deepwaters of the gulf(portion belonging to America), there are some 300 wells dug every year, but Mexico has dug just ten till now, with no success. Summarize: Mexico certainly looks like running out of steam, also there is lack of political will to undertake long term projects. It seems the level of activity would go on decreasing Brazil provides with an outstanding opportunity, however the decline in GOM is a great cause for concern. Fall 2009 Diamond Offshore Drilling Inc. 15
Driver: Expected Production Going Ahead Fall 2009 Diamond Offshore Drilling Inc. 16
Relation Between Oil Prices and Production As expected oil prices and production are highly correlated but with a lag, infact Fall 2009 with a drop in price 2008 was a good year for DO(Backlog). Diamond Offshore Drilling Inc. 17 even
Driver: Global Demand for Oil and gas • • • Sort term outlook for Global Crude oil Global Petroleum Consumption EIA projects world oil consumption growth of 1. 1 million bbl/d in 2010, with almost all of the growth occurring in the non-OECD countries. Non-OPEC Supply Non-OPEC supply is expected to increase by 0. 6 million bbl/d in the second half of 2009 and by 0. 2 million bbl/d in 2010, compared with year-earlier levels. OPEC Supply EIA projects OPEC crude oil production to climb to 29. 3 million bbl/d in the second half of 2009, and then average 29. 2 million bbl/d in 2010. Global Petroleum Inventories EIA expects OECD oil inventories to remain higher than average historical levels throughout the forecast period. • • • Critical forecast for OIL prices During the 5 days ending October 1, 2009, NYMEX futures market participants were pricing WTI delivered to Cushing, Oklahoma, in December 2009 at an average of $69 per barrel The 95 -percent confidence interval for the December 2009 futures contract is $49 per barrel and $96 per barrel for the lower and upper limits of the confidence interval, respectively. The 95 -percent lower and upper confidence limits for the December 2010 futures contract are $32 per barrel and $168 per barrel. While near-term implied volatilities are now lower, and confidence intervals narrower, than they were at this time last year, the current confidence intervals highlight the fact that there continues to be significant uncertainty in the outlook for oil prices Forecast: Average Oil price Winter(Oct-Mar)-77$ and rest of 2010 - 81$ Fall 2009 Diamond Offshore Drilling Inc. 18
Recent Indicators: Day Rate Index • • Mid-water semisubmersible day rates plunge DO has about 19 Mid-water semi submersibles High Specification Floaters DO has 11 High specification floaters The dayrates are important to estimate our revenues going forward. Fall 2009 Diamond Offshore Drilling Inc. 19
Recent Indicators: Day Rate Index • • Jack-Up utilization as well as day rates have plunged Out of 6 Jack ups that DO had in the GOM 5 of them have moved out, two have found work where as 3 of them are cold stacked. Fall 2009 Diamond Offshore Drilling Inc. 20
Summary for Business Model • • We have backlog of 8 billion as of now. The oil prices are expected to be at 77$ during the winter(Oct. Mar) and 80$ for the rest of 2010. The average Nymex future prices for 2011 -2014 is at 87. 5 as of(11/11/2009) The day rates have bottomed out so we can expect higher rates going forward. The demand for high specification floaters(9) and Semi-subs(24) looks strong and that adds to our strength. GOM is an area of concern, however the management has started marketing some of the GOM rigs in other beneficial areas. The market for Jack-up is weak and volatile so we have accounted for that in our assumptions. Lets look at DO’s Competitors. Fall 2009 Diamond Offshore Drilling Inc. 21
Industry Outlook: Competitors • • Transocean ENSCO International Noble Corporation Various Oil companies Fall 2009 Diamond Offshore Drilling Inc. 22
Assets Comparison Fall 2009 Diamond Offshore Drilling Inc. 23
Porter’s 5 -force Analysis Indicates a Relatively Attractive Industry Bargaining Power of Buyers ↘ 2 ↗ 4 Threat of New Entrants 4 ↘ Period of low oil price / low demand for rigs ↗ Periof of high oil price / high demand for rigs Numbers are attractiveness degrees: 1 very unattractive - 5 very attractive Fall 2009 Rivalry ↘ 2 Threat of Substitutes ↗ 5 5 Bargaining Power of Suppliers ↘ 5 ↗ 3 Diamond Offshore Drilling Inc. One needs to acknowledge that depending on the depth of drilling, the forces have different attractiveness strenghts. This is an average representation. 24
Porter’s 5 -force • Bargaining Power of Buyers ( Low oil price/demand 2 – High oil price/demand 4 ) – – • Bargaining Power of Suppliers ( 5 – 3 ) – • No foreseeable substitutes Threat of New Entrants ( 4 ) – • Shipyards have contra-cyclical bargaining power. Indeed when price of oil are low, even more if it is for a long time, the number of platform asked will drop. Therefore they will have to lower their price and have less power of negotiation. In period of recovery or sustainable high demand for drilling operation the shipyard will have more bargaining power as the orders are (too) numerous. Threat of Substitutes ( 5 ) – • Contract subscribtors are big oil companies which are often much bigger than DO. The number of DO customers is quite limited (around 50) However current demand pressure on deep-water rigs allows DO to keep much of the bargaining power On the other hand when market for oil drilling is poor, DO sees is bargaining power weaken especially for Jackups. Quite limited because of the need for capital (in order to buy the drilling platform) and for experienced employees. Those barriers are gradually stronger as we get in deeper water. For jackup-deep drilling the threat of new entrants are strong (attractiveness = 2) but they are low for 10, 000 feets drilling (5) Rivalry ( 2 – 5 ) – – Fall 2009 Rivalry is quite strong with a lot of oil drilling companies of important size (fleet > 20 platforms). The industry is currently consolidating. Again level of rivalry depend of the depth of drilling we are referring to and of the position in the cycle. Diamond Offshore Drilling Inc. 25
SWOT Analysis Strengths • Important part of the fleet capable of drilling at 4000 ft and more • Geographical repartition of assets • Track record and crew Weaknesses • High dependency on a few customers (2 = 20%, 5 = 40%) Opportunities • Operating in a growing industry • Lift of U. S. Oil drilling ban • Technology progress will enable oil drilling companies to access more oil reserves Fall 2009 Threats • Intense competition in the jackup segment • Energy price sustainably low • Oil companies increasing their own drilling capacity • Environmentaly friendly trend Diamond Offshore Drilling Inc. 26
We believe the management is well aware of the key risks… • • • Business depends on “Level of activity in the oil and gas exploration”, development and production. The forces behind level of activity… i] Global Demand for oil and gas ii] Oil and gas prices iii] Potential of expected changes in prices iv] Economic and political factors • • • Company specific risks… i]Shortage of skilled workers ii] Possibility of early termination of contracts iii] Risks related to foreign operations iv] Need to be at the right place at the right time • Fall 2009 Diamond Offshore Drilling Inc. 27
And has been acting accordingly • • • Spreading the fleet geographically while hedging part of its currency exposure Trying to obtain a non defavorable dayrate for its contract by: Balancing Short term et long term contracts Actively trying to balance contract for which the day rate is definied at the signature and those for which it is at the beginning of execution Keeping key employees during the boom period by setting up a retention program The main managers have been the same for at least 4 years. Fall 2009 Diamond Offshore Drilling Inc. 28
FINANCIAL ANALYSIS Fall 2009 Diamond Offshore Drilling Inc. 29
Du Pont Fall 2009 Diamond Offshore Drilling Inc. 30
Stock Performance Fall 2009 Diamond Offshore Drilling Inc. 31
QUANTITATIVE ANALYSIS Fall 2009 Diamond Offshore Drilling Inc. 32
Return and Risk Fall 2009 Diamond Offshore Drilling Inc. 33
Return and Risk Fall 2009 Diamond Offshore Drilling Inc. 34
Correlation Fall 2009 Diamond Offshore Drilling Inc. 35
WACC Fall 2009 Diamond Offshore Drilling Inc. 36
FUNDAMENTAL ANALYSIS Fall 2009 Diamond Offshore Drilling Inc. 37
Assumptions Fall 2009 Diamond Offshore Drilling Inc. 38
Current Holdings • Sep 09 - Sold 100 shares @76. 25 against exercise of adjusted strike on short call • Apr 09 - Presentation to sell a Sep. 80 Call @ 5. 85 and buy a Sep. 50 put @ 4. 78 • Nov 08 - Presentation to buy 50 shares at 72. 96 • Feb 08 - Presentation to buy 100 shares at 122. 82 Fall 2009 Diamond Offshore Drilling Inc. 39
Recommendation • Stock Price on Nov-11 -2009: $101. 38 • Our DCF value: $85. 76 • Hold 50 shares of Diamond Offshore Fall 2009 Diamond Offshore Drilling Inc. 40
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