Top Five Large-Cap Stocks: July 16

It is important to remember that any unexpected sharp downturn in oil and gas prices could negatively affect Murphy Oil's earnings. In addition, oil prices, which are highly volatile and cyclical in nature, are trading at record levels and could be vulnerable to weaker economic conditions. High prices may also create heightened demand for low-cost alternatives, and could thus, hurt overall demand for oil and gas products.

Diamond Offshore Drilling(DO Quote) engages in the contract drilling of oil and gas wells. The company's fleet of 30 submersibles enables it to offer a range of services in various markets worldwide, including the deepwater, harsh-environment and conventional semisubmersible markets. Diamond also owns 13 jack-up rigs, which are mobile, self-elevating drilling platforms equipped with legs that are lowered to the ocean floor until a foundation can be built to support the platform. Finally, Diamond also has one drillship, the Ocean Clipper, located offshore Brazil.

We have rated Diamond a buy since June 2005, on the basis of various strengths displayed by the company. Boosted by solid sales growth from its contract drilling business segment, Diamond's revenue surged 29.3% year over year to $666.70 million in the first quarter of fiscal 2008. First quarter earnings rose 29.7%, fueled by a rise in daily rates for the company's deepwater rigs. Net income for the quarter increased to $290.63 million, or $2.09 per share, from $224.15 million, or $1.64 per share, in the first quarter of fiscal 2007.

In keeping with its policy of considering the payment of special cash dividends on a quarterly basis, Diamond's board of directors recently declared a special cash dividend of $1.25 per share of common stock in addition to a regular cash dividend of 12.5 cents per share of common stock. Both dividends are payable in June 2008. Finally, Diamond's debt-to-equity ratio is very low at 0.17, implying that debt levels have been successfully managed.