real client managed portfolio diamond offshore (do) october 25, 2012 presented by: eric hoffman...
TRANSCRIPT
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Real Client Managed Portfolio
Diamond Offshore (DO)October 25, 2012
Presented By:Eric Hoffman
Patrick O’DonnellXiaohua (Leah) Xu
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Agenda• Diamond Offshore in the Portfolio
• Macro-Economic Review
• Stock Market Prospects
• Diamond Offshore (the Business)
• Financial Analysis
• Financial Projections
• Application of Financial Tools
• Recommendation
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Diamond Offshore In the PortfolioFebruary 2008
• Purchased 100 shares @ $122.90 for a total cost of $12,290• Give portfolio exposure to oil and drilling sector
November 2008• Purchased 50 shares @ $72.96 for a total cost of $3,648
September 2009• Written call option exercised, sold 100 shares at adjusted price of
$76.25 totaling $7,625 • Strike price adjusted to $76.25 from original strike price of $80.00 due
to a special cash dividend of $1.875 paid twice over the holding period of the option
• Realized loss of $4,665November 2010
• Purchased 100 shares @ $68.10As of October 24, 2012
• Diamond offshore price: 69.52• Currently have 150 shares with unrealized loss of -.2%• Currently represents 3 % of the total portfolio (7.6 of portfolio equity
holdings)
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The Company• The company originally started as Diamond M Drilling
company. In 1980, Loews Corp bought the distressed
company’s assets. The company was renamed to
Diamond offshore and held private until 1995.
• Currently one of the largest off-shore drilling corporations
• Headquartered in Huston, TX – Global presence (primarily
in South America, Middle East, Africa, Asia and Pacific
Asia)
• 98% owned by 447 institutional and Mutual fund
shareholders
• 50.4% Owned by Loews Corporation (Jim Tisch).
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• The primary driver of the drilling
market is energy consumption.
– Easier for DO to earn contracts
– Determines capacity/daily use rates of rigs
– Greater demand for product naturally
shifts power from buyer to supplier.
Macro Economic Review
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Source: U.S. Energy Information Administration, International Energy Outlook 2011
:
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Source: U.S. Energy Information Administration, International Energy Outlook 2011
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Company Overview
• Leading global offshore oil and gas drilling contractor
• Customer Base
• major independent oil and gas companies• government-owned oil companies
• Capacity: 44 offshore rigs as June 30, 2012• 32 semisubmersibles • 7 jack-ups• 5 dynamically positioned drillships
• 4 of them are under construction: delivery expected in second and fourth quarters of 2013 and the remaining two in the second quarter of 2014Source: Form 10Q,Diamond offshore, FY 2012
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The fleet
Source: Form 10k,Diamond offshore, FY 2011
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Stock performance
BP oil spill in the Gulf of Mexico
Source: Yahoo Finance, dates from 1/1/08 – 10/24/12
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Competitors
• Transocean (RIG): 9 Billion sales
• Noble Corporation (NE): 3 Billion sales
• Ensco PLC (ESV): 4 Billion sales
Source: Yahoo Finance, dates from 1/1/08 – 10/24/12
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Business Strategy
• Cost Leadership– Reduced Equipment downtime– Safety
• Upgrade fleet to meet customer demand for advanced efficient and high-tech rigs
– Acquire or build new rigs at attractive price– Enhance the capabilities of existing rigs at a lower cost and reduced construction
period
• Take advantage of industry cyclicality to make opportune investments at times of distress or when others are unwilling or unable to invest
– 2009: acquired two new-build ultra-deepwater, dynamically positioned semisubmersible drilling rigs
– 2010: entered into three separate turnkey contract with Hyundai for three ultra-deepwater drillships
– 2012: announced the construction of a moored semisubmersible drilling rigs that will be designed to operated in water depth up to 6,000 feet
Source: Form 10-K,Diamond offshore, FY 2011
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Business Model
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Revenue Drivers• Day Rates
– Ultra-deepwater and deepwater: strong • successful exploration and development
programs offshore Brazil and West Africa– mid-water floater: stable – Jack-up: Decline
• Utilization Rate:– the actual percentage of time in a year a rig
would be utilized
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Revenue DriversDay Rates
Source: DO 10K and 10 Q 2005- 2011
Utilization Rate
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Financial Analysis
• So…How does this company make money?
• Jack ups (10 – 350 Ft)
• Intermediate Submersibles (4000 ft)
• Deep-water Drillships/Submersibles (greater
than 4000 ft)
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The Fleet
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The Contracts
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• See Excel “Estimate”
The Estimates
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• Customers: DO’s five largest customers in the
aggregate accounted for 62% of our consolidated
revenues primarily lead by Petrobras and OGX (who
accounted for approximately 35% and 14% of DO’s
consolidated revenues in 2011).
• Location:
– 40% North America
– 20% South America
– 20% Africa/ Europe/Mediterranean
– 20% Asia/Pacific Asia
So where is the revenue coming from?
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• Depreciation
• Bad Debt Expense
• Impairment
• Sell for Loss Transactions
• Foreign Exchange
So where is the revenue leaving?
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Multiples Valuation
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Multiples Valuation
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DuPont Breakdown
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Historical Returns
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WACC Analysis
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DCF Analysis
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Recommendation: Hold
• Current Stock Price:$69.52
• DCF Valuation:$67.79
• Comparable Companies Valuation:$67.06
• Recommendation: Hold 150 shares