Diamond Offshore Drilling Inc.Presented by Ben Hier & Brandon Lee
February 26, 2008
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Agenda Company Overview Industry Outlook Competitors Portfolio Fit & Valuation Recommendation
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Company Overview Diamond Offshore Drilling Inc. is a leading
global offshore oil & gas drilling contractor
Headquartered in Houston, Texas
Fleet of 46 offshore rigs
Strategy: “Economically Upgrade Fleet”
51% Owned by Lowes Corp (NYSE: LTR)
NYSE Listed: DO
Ocean Endeavor
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Company History (1953) First submersible offshore rig developed
Ocean Drilling & Exploration Co. formed (ODECO)
(1992) Diamond M Corp. purchased all of ODECO for $372M
(1993) Officially renamed Diamond Offshore Drilling Inc.
(1995) Lowes Corp. (LTR) sold 30% of Diamond Offshore in an IPO Diamond Offshore listed on the NYSE: (DO)
(1996) Diamond acquired Arethusa (Offshore) Ltd. Transaction reduced LTR’s ownership to 54% Land division sold to DI Industries Inc.
(2008) Diamond is the world’s third largest offshore drilling contractor
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Managerial Team James S. Tisch – CEO (1998-Present)
Mr. Tisch has served as CEO of Loews, a diversified holding company and Diamond’s controlling stockholder, since January 1999.
Lawrence R. Dickerson - President, COO, & Director (1998-Present)
Mr. Dickerson served on the United States Commission on Ocean Policy from 2001 to 2004.
Gary T. Krenek - Senior Vice President & CFO (2006-Present)
Mr. Krenek previously served as Vice President and CFO since March 1998.
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Business Model Contracts obtained through
competitive bidding
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
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Investment Thesis Drillers have high barriers to entry with large capital investments
Cost to build a new floater ($440M, up over 400% since 1980)
Major E&P companies are facing declining reserves & must drill deep offshore for growth
Tupi oil & gas discovery 5-8 billion barrels of offshore reserves
Diamond has one of the largest supplies of midwater floaters, which are in short supply
International exposure buffers against more cyclical GOM drilling 50% of revenues generated in ’07 came from international operations
Contract Drilling backlog provides cash flow & earnings visibility $10.84B in contract drilling backlog
Well managed with a shareholder friendly dividend policy Expected to payout 60-80% of net income in special dividends
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Investment Risks Volatility of energy
prices
Reduced E&P expenditures
Oversupply of rigs
Decline in dayrates
Geopolitical risks
Early termination of contracts
Shortage of skilled labor
Weather
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The Fleet – Focused on DeepwaterType Nominal Water Depth (Feet)* Average Dayrate**
High-Specification Floaters Semisubmersibles (11)
3,500-10,000 $317,000 (+25% YOY)
Intermediate Semisubmersibles (19)
1,1000-4,000 $218,000 (+41% YOY)
Drillship (1) 7,500 $180,000
Jack-ups (15) 200-350 $115,000 (+2% YOY)
*2006 10-K
**2007 8-K
Semisubmersible Jack-up Drillship
Deepwater!
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BacklogRig Days Committed 2008 2009 2010 2011-2015
High-Specification Floaters 99% 73% 51% 14%
Intermediate Semi’s 94% 83% 53% 19%
Jack-ups 48% 17% 2% --
•Total backlog as of February 7, 2008: $10.84B
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Agenda Company Overview Industry Outlook Competitors Portfolio Fit & Valuation Recommendation
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Oil Demand by Country
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Short Term Energy Outlook Over the next two years, an easing of prices is expected $80 oil will support large offshore expenditures Spot price of West Texas Intermediate (WTI) crude oil:
Averaged $72 per barrel in 2007 Averaged $93 per barrel in January 2008 Expected to average $87 in February 2008 Expected to average $86 per barrel in 2008 Expected to average $82 per barrel in 2009
World oil consumption is expected to grow by 1.4 million bbl/d in 2008
Non-OPEC supply in 2008 is projected to be slightly higher based on output growth from Brazil.
OPEC production will depend on the pace of consumption growth, inventory trends, and oil prices.
U.S. Production is projected to remained unchanged in 2008.
Source: Department of Energy
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Crude Oil Prices
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Deep & Semi Day Rate Index
Source: http://www.ods-petrodata.com
•Deepwater markets continue to exhibit high utilization & tight supply
•Bullish for Diamond Offshore
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Jack-up Day Rate Index
•Diamond has (7 out of their 13 active) Jack-up rigs in the GOM
•Management is actively bidding 3-4 of the 7 internationally
•GOM Jack-ups account for less than 10% of revenue
•GOM dayrates are stabilizingSource: http://www.ods-petrodata.com
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Worldwide Contract Status & Expected Demand
Source: Company Presentation 9/4/07
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Global Offshore Expenditures
•Offshore Expenditures $193B (2006) to $248B (2010E)
•Offshore drilling has more upside than traditional land drilling
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Agenda Company Overview Industry Outlook Competitors Portfolio Fit & Valuation Recommendation
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Competitors Highly competitive industry
“Numerous industry participants, none of which…has a dominant market share”
Transocean (NYSE: RIG) operates 139 of the 1,202 offshore rigs worldwide
#1 Market Share
Diamond operates 46 offshore rigs
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DO vs. NE vs. RIG vs. ATW (1YR)
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DO vs. NE vs. RIG vs. ATW (5YR)
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DO vs. S&P 500 (1YR)
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The Fleet vs. CompetitorsType Diamond Offshore (DO) Transocean (RIG) Noble (NE)
Semisubmersibles 30 68 13
Jack-ups 15 67 43
Other 1 4 3
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Comparable ValuationDO RIG NE ATW
Market Cap $16.59B $41.05B $13.39B $3.05B
Employees 5,400 20,000 6,000 900
Offshore Rigs 46 139 59 9
Operating Margin 47.65% 50.67% 49.77% 47.78%
Profit Margin 36.42% 49.14% 40.26% 34.71%
EBITDA $1.44B $2.95B $1.78B $211M
P/E (ttm) 19.52 10.01 11.15 19.67
P/E (Forward) 7.44 8.95 7.17 7.84
Current Ratio 2.79 1.12 1.73 5.03
Debt/Equity (mrq) .18 .31 .18 .08
Payout Ratio 94% N/A 3% N/A
RIG-Transocean, NE-Noble, ATW-Atwood Oceanics
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Agenda Company Overview Industry Outlook Competitors Portfolio Fit & Valuation Recommendation
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Correlation to RCMP Holdings
Low Correlation To Holdings!
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DCF Assumptions
Beta: 1.22 DCF WACC: 11.12% Bloomberg WACC: 10.98% Terminal Growth: 5%
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DCF Valuation Current Price: $119.49
DCF Value: $135
Intrinsic Value: $122-$149
Estimated Special Dividend Yield: 5.6%
Estimated Total Return: 18%
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Sensitivity Analysis
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Multiple Valuation & Conclusion
DO RIG NE ATW
EV/EBITDA 11.38 14.30 7.73 13.53
PEG Ratio .31 .64 .40 .42
2008E P/E 7.44 8.95 7.17 7.84
RIG-Transocean, NE-Noble, ATW-Atwood Oceanics
Multiple valuation supports DCF analysis
DO provides portfolio diversification into energy & basic materials
Stock is 20% below its 52-week high (December 26, 2007)
Diamond Offshore is undervalued & should be bought
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Agenda Company Overview Industry Outlook Competitors Portfolio Fit & Valuation Recommendation
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Recommendation Purchase 100 shares of (DO) at the market
Approximate investment: $11,949
Diamond Offshore is the energy company to own!