Diamond Offshore Drilling Inc. (DO) reported its third quarter earnings of $2.62 per share, compared to the Zacks Consensus Estimate of $2.28 and year-earlier earnings of $2.23. Total revenue of $908.4 million for the quarter increased marginally year over year, mainly driven by contribution from the deepwater rigs.

Importantly, Diamond maintained its special cash dividend of $1.875 per share in this quarter. This is in addition to its regular quarterly dividend of 12.5 cents per share (50 cents per share annualized). Both dividends are payable on Dec 1 to shareholders of record on Nov 2, 2009.

Despite slightly lower dayrates for high specification floaters, contract drilling revenue got marginally increased year-over-year to $885.3 million. The high specification floaters accounted for nearly 40% of the total quarterly contract drilling revenue, while intermediate semi-submersibles and jackups accounted for 48% and 12% of the total, respectively.

Diamond’s Gulf of Mexico (GoM) high specification floaters recorded an average dayrate of $389,000 during the quarter, down nearly 1% year over year. Intermediate semi-submersible rigs realized an average dayrate of $278,000, down more than 3% year over year, while jackup rigs’ dayrates averaged $117,000, up more than 4% year over year.

High specification rig utilization was 75% during the quarter, down from 86% in the year-ago quarter. Intermediate category rig utilization was 84%, up from 79% in the year-ago quarter. Meanwhile, jackup rig utilization was 65%, down significantly from 89% in the prior-year quarter.

While contract drilling expenses decreased more than 3% to $304.1 million, contract drilling operating income increased by more than 2% to $581 million. At the end of the quarter, Diamond had approximately $251 million in cash on hand and $999 million in long-term debt. Debt-to-capitalization ratio at the end of the quarter stood at about 21.6%.

Diamond has established quite a track record in returning excess cash to shareholders through special dividends. Though its healthy backlog position offers a high level of earnings and cash flow visibility, we are concerned about the declining drilling activity, which is expected to be further exacerbated by the arrival of new-build rigs over the coming years. We recommend a Neutral rating for Diamond shares.

Zacks Investment Research
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