Earnings Preview: Diamond Offshore

Leading oil and gas drilling contractor, Diamond Offshore Drilling Inc. (DO), is expected to report its first quarter 2011 earnings on Thursday, April 21, before the opening bell. The Zacks Consensus Estimate for the first quarter is $1.44 per share.

Preceding Quarter Recap

Diamond’s earnings per share, excluding one-time items, came in at $1.74 in fourth quarter 2010, surpassing the Zacks Consensus Estimate of $1.45. However, results were below the year-ago profit of $1.98 per share. Total revenue in the quarter dropped nearly 5.6% year over year to $841 million and missed the Zacks Consensus Estimate of $847 million.

As of December 31, 2010, Diamond had approximately $464.4 million in cash on hand and $1.5 billion in long-term debt. Debt-to-capitalization ratio at the end of the quarter was about 27.9% (versus 28.6% in the previous quarter).

Agreement of Analysts

The analysts exhibit a positive sentiment for Diamond for the to-be reported quarter based on the company’s strong leverage to the offshore deepwater drilling market and healthy financial profile.

In the last 30 days, out of the 29 analysts covering the stock, 5 analysts have raised their estimates and 4 analysts have lowered the same for the first quarter of 2011. In the last seven days, only one analyst has revised the estimate upward while none moved in the opposite direction.

Magnitude of Estimate Revisions

Taking into effect the analysts’ earnings revision, the Zacks Consensus Estimate for the first quarter went up by a penny to $1.44 per share, over the last 30 days. For the past 7 days, the Consensus Estimate for the quarter remained static.

Surprise History

Diamond exhibited a mixed earnings surprise trend over the last four quarters. The company recorded a minimum surprise of negative 8.00% in second quarter 2010 while a maximum of 20.00% in fourth quarter 2010. On average, the earnings surprise was positive 6.22%.

However, the current Zacks Consensus Estimate for the first quarter shows downside potential of 0.69%.

Our Recommendation

Houston, Texas-based Diamond Offshore offers a range of services in deep water, harsh environment, conventional semisubmersible, and jackup markets. The company’s fleet comprises 32 semisubmersibles, 13 jackups and 3 dynamically positioned drillships, of which two are under construction with an expected delivery date in 2013.

We believe that Diamond Offshore exhibits solid fundamentals with significant free cash flow potential and solid contract backlog position. However, we remain slightly concerned about the uneven mid-water markets with the expectation of a gradual decline in Midwater rates and volatile oil and gas prices. The company faces competition from peers such as Nabors Industries Ltd. (NBR) and Transocean Ltd. (RIG).

We maintain our long-term Neutral recommendation for Diamond shares. The company also holds a Zacks #3 Rank (short-term Hold rating).

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