The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By Tim Begany
NEW YORK ( StreetAuthority) -- Although energy stocks have been hot as a group -- already jumping nearly 13% so far in 2012 -- individual performance is all over the board, ranging from double-digit gains to double-digit losses. And just because a stock is up a lot doesn't mean it's worth getting excited about.
In fact, there's one energy stock I'd like to warn you about.This well-known company, an offshore driller with 46 rigs that are contracted out to large oil and gas companies around the world, has seen its stock rise about 25% in 2012. But I'm not impressed. If you take a closer look, then you'll see this company hasn't invested adequately for the future -- a short-sighted approach that's about to come home to roost. The company I'm referring to: Diamond Offshore Drilling (DO) As I see it, Diamond Offshore has gotten itself into a fix by focusing too much on dividend payments and not enough on equipment upgrades. From 2008 to 2011, for example, the combined dividend payout was nearly $23 a share -- a total of about $3.2 billion. This consisted mainly of "special dividends" or one-time payments over and above the scheduled dividend, which amounted to $2 a share from 2008 to 2011 for a total scheduled payout of $278 million during those four years. During the same period, the company put about $2.3 billion -- 28% less than it paid in dividends -- toward capital investments such as upgrading existing rigs and buying new ones. This obviously wasn't enough. Diamond Offshore now has one of the oldest fleets in the offshore drilling industry, with an average rig age of nearly 30 years. The company opted against extensive equipment upgrades and new purchases during the past few years because it believed returns on such investments would be too low in a recessionary economy. But now the economy is picking up, oil prices are rising and deepwater drilling activity is increasing. Management may be wishing it had put a lot more cash toward capital improvements instead of special dividends. But it didn't, and now it's stuck with one of the least competitive rig fleets in the world. To make things worse, it may be a few years before the company can aggressively invest in upgrades, since many of its rigs are tied up in long-term contracts that don't expire until 2015.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV