This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why You Should Sell This Oil Stock

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.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $118.30 0.42%
FB $104.24 -1.15%
GOOG $742.60 -1.02%
TSLA $230.26 -0.58%
YHOO $33.81 2.64%


Chart of I:DJI
DOW 17,719.92 -78.57 -0.44%
S&P 500 2,080.41 -9.70 -0.46%
NASDAQ 5,108.6660 -18.8590 -0.37%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs