Diamond Offshore Drilling's Stock Surges on Better-Than-Expected Earnings

What: Shares of Diamond Offshore Drilling are having their moment in the sun as shares are up 10% at the time of this writing and reached as high as 13% after announcing third-quarter earnings results that exceeded analyst expectations.

So what: Diamond reported net income of $136 million, or $0.99 per fully diluted share. This was well above Wall Street's expectations of $0.60 per share despite revenues declining by more than 17% compared to last year. Diamond more than made up for the declines in revenue because it was able to reduce its contract drilling expenses by more than 30% over the same time period.

Another reason that investors seemed so keen on this quarter's results was the company's ability to secure a one-year drilling contract for itsOcean Guardiansemi-submersible rig. Also, in exchange for terminating the contracts for its Ocean Clipper and Ocean Alliance rigs with Petrobras , the Brazilian oil producer has agreed to extend the contract of Ocean Courage out to 2020 at a rate of $330,000 per day. Ocean Clipper will be subsequently retired and scrapped while Ocean Alliance will be cold stacked.

Long term, these moves help to ensure some long-term contract coverage to work through this major downturn of drilling activity and oversupply of rigs. At the same time, taking these rigs out of commission will help to reduce Diamond's contract drilling expenses even further.

Now what: You have to give Diamond some credit for managing the downturn relatively well. It has been able to keep its newer rigs working while removing some of its older ones from the market. As with other rig companies, though, these next several quarters will be the real test. Demand for offshore rig work will continue to be weak as companies scale back spending programs even more, which will lead to fewer new contracts as existing ones start to roll off.

It's probably best to sit on the sidelines until we see how the rig market shakes out over the next several quarters.

The article Diamond Offshore Drilling's Stock Surges on Better-Than-Expected Earnings originally appeared on Fool.com.

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