The offshore rig business has been in a state of decline for more than two years. Even before oil prices started to crash, there was a concern that there were too many rigs fighting to find work. The crash came in the middle of 2014, and the industry has been falling ever since. This past quarter, though, Diamond Offshore Drilling (NYSE: DO) posted the first increase in revenue in a long time.
Here's a look at what happened this past quarter that led to the uptick in revenue, and how that may make investors think differently about this stock.
By the numbers
The most surprising element of Diamond's most recent earnings report was the increase in revenue. That isn't something we have seen from offshore rig companies lately. The gains came from the company's ability to find work for two of its ultra-deepwater floating rigs, which started on contract in mid-February, according to Diamond's most recent fleet status report.
Another encouraging sign is that those contracted assets ran at a high utilization rate. Operational efficiency improved to 96.6%. Less downtime means that more days on those term contracts are revenue-generating days, which translates to better profits. Management has attributed this to its Pressure Control by the Hour agreement with General Electric (NYSE: GE) to own and lease blowout preventers to Diamond, rather than Diamond owning the equipment itself.
The reason those higher revenue figures didn't flow to the bottom line was that the company took a $71 million asset impairment charge related to some of its older vessels that have gone off-contract. Adjusting for these noncash impairments, net income for the quarter would have been $0.45 per share.
The modest income result and minimal capital spending allowed Diamond to generate $105 million in free cash flow, most of which went to paying down the company's short-term borrowings. With its debt-to-capital ratio of 34% and most of its current rigs contracted to work for at least a year, Diamond is in as good a shape as any other rig company today.
What management had to say
It appears that Diamond's partnership with General Electric on the Pressure Control by the Hour program is reaping notable rewards. CEO Marc Edwards went out of his way to single out the success of the program thus far:
What a Fool believes
New contracts, high rates of operational efficiency, and the scrapping of a couple of older rigs have allowed Diamond to keep its earnings in positive territory when so many other rig companies' results are in the loss column. To improve its results from here, the company will need to find work for its cold-stacked rigs, which will be harder when having to bid against rigs that are still "hot" -- those that have just gotten off a contract and are ready to work immediately.
That said, Diamond is in pretty good shape right now, and should have the ability to reinvest in the business through either newbuilds or acquisitions. Considering that the stock still trades at a considerable discount to its tangible book value, Diamond is one of the best ways to invest in the return of offshore drilling.
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