2023-05-15 04:50:29 ET
Summary
- Diamond Offshore reports better-than-expected first quarter 2023 results but according to statements made by management on the conference call, the outperformance was largely a result of timing issues.
- Management reaffirmed full-year top- and bottom-line expectations with profitability expected to pick up substantially in the second half of the year.
- The contractual requirement to install a managed pressure drilling system on the drillship Ocean Blackhawk will result in an additional $25 million hit to free cash flow this year.
- With some of the company's highest-specification rigs still working on legacy contracts at painfully low rates, ongoing weakness in the North Sea market, and three units remaining cold-stacked, investors will have to look forward to 2024 as a likely inflection point.
- Shares remain inexpensive relative to a number of peers based on 2024 EV/EBITDA estimates. Investors should use any major weakness to initiate or add to existing positions.
Note:
I have previously covered Diamond Offshore Drilling, Inc. ( DO ), so investors should view this as an update to my earlier articles on the company.
Last week, leading offshore driller Diamond Offshore Drilling ("Diamond Offshore") reported somewhat better-than-expected first quarter 2023 results but according to statements made by management on the conference call , the outperformance was largely a result of timing issues.
Company Presentation
Management also reaffirmed full-year top- and bottom line expectations with profitability expected to pick up substantially in the second half of the year:
Company Presentation
Guidance for capital expenditures was raised by $25 million as last week's contract award for the ultra-deepwater drillship Ocean BlackHawk in the U.S. Gulf of Mexico requires the installation of a managed pressure drilling ("MPD" system.
Suffice to say, the increased capex requirements will put further pressure on the company's free cash flow this year which was already expected to remain negative before last week's contract announcement.
With some of the company's highest-specification rigs still working on legacy contracts at painfully low rates, ongoing weakness in the North Sea market and three units remaining cold-stacked, investors will have to look forward to 2024 as a likely inflection point for Diamond Offshore with the potential for Adjusted EBITDA to almost double from 2023 levels.
In addition, the company's focus on the moored semi-submersible rig market doesn't help things either as rates for this niche asset class continue to lag substantially behind the drillship segment.
In recent months, the company has secured an aggregate $50 million in additional work for its semi-submersible rigs but these awards were easily dwarfed by the above-discussed $162 million contract for the drillship Ocean Blackhawk .
Backlog including last week's $212 million in aggregate contract awards amounts to approximately $1.8 billion but this number includes an estimated $250 million related to managed drillships " Auriga " and " Vela. " With rig owner Aquadrill LLC recently having been acquired by former parent Seadrill ( SDRL ), both management contracts are unlikely to be extended.
That said, the company remains cheap as it continues to trade below 5x my 2024 EV/EBITDA estimate.
Not surprisingly, management stated its intent to increase the company's financial flexibility following similar moves by competitors Noble Corporation ( NE ) and Valaris ( VAL ) in recent weeks:
On the back of the continued improvement in the market and our own results, including the award of the new contracts we announced yesterday, we are evaluating opportunities to enhance our capital structure and establish regular way financing that provides more flexibility than our current post-emergence debt instruments. To be clear, we are not under any pressure to refinance our outstanding debt, given that maturities are still 3 and 4 years away in 2026 and '27, not to mention the increasing liquidity profile we anticipate as we exit '23 and move through 2024.
However, should we be able to simplify our debt stack, increase our liquidity, reduce our cost of capital, increase our weighted average time to maturity and maintain our revolving credit facility, we would opportunistically entertain a refinancing transaction or a series of transactions. Of course, the sizing, pricing and terms of such transactions would have to be attractive, and we would need modification to certain covenants and restrictions in our revolver to help facilitate this.
Management also provided some valuable insights into the requirements of contracts awarded by Petrobras ( PBR ) for work offshore Brazil (emphasis added by author:
As you know, rates for Petrobras in Brazil generally include a service provision that can cost anywhere from $30,000 to $60,000 a day for additional services . And so those rates are naturally somewhat inflated compared to similar rates earning the exact same margins in other regions.
Applying these numbers to the recent contract award for competitor Transocean's ( RIG ) ultra-deepwater drillship Dhirubhai Deepwater KG2 would result in the calculated "clean" dayrate to be reduced by up to 15% to below $400,000.
Bottom Line
Very similar to larger competitor Valaris Limited, it will take more time for Diamond Offshore Drilling to fully participate in the ongoing industry recovery.
That said, the company's shares continue to look inexpensive relative to a number of peers based on 2024 EV/EBITDA estimates.
In addition, odds remain in favor of Diamond Offshore Drilling being acquired by a larger competitor in the not-too-distant future.
Despite some recent volatility in oil prices and related stocks, I am reiterating my "Buy" rating on the company's shares.
At this point, I remain constructive on the entire industry, including leading U.S. exchange-listed players Seadrill, Valaris, Borr Drilling ( BORR ), Transocean, Noble Corporation, Helix Energy Solutions ( HLX ) and offshore drilling support providers like Tidewater ( TDW ) and SEACOR Marine Holdings ( SMHI ).
For further details see:
Diamond Offshore: Inexpensive, But Earnings Inflection Still Several Quarters In The Future