January 24, 2013
There is an increased pressure on offshore drilling companies like Diamond Offshore Drilling, Inc. (NYSE: DO) [
Full Research Report
to meet the demand for deep water drill rigs as traditional oil fields begin to decline. To supply the market with sufficient oil, Diamond's senior vice president predicts that 40 deep water rigs could be operational in the U.S.
Gulf of Mexico
this year. The average contract duration for ultra-deep water rigs have also doubled to about four years compared to the first six months of 2012.
Offshore oil drilling was brought to a halt after Deepwater Horizon oil well collapsed in 2010. But the conditions in the area have improved since last year, and drilling activity has begun to recover. Furthermore, since traditional oil fields have been producing less and less yield each year, oil companies are forced to look for oil in deep water locations. This has opened new opportunities for companies such as Diamond Offshore Drilling. Undervalued stocks across the sector are also attracting more investors.
In the third quarter of 2012, the company reported
earnings per share, going past the analyst consensus estimate of
. This was unexpected due to Diamond Offshore Drilling's revenue decreasing by 17% compared to the same quarter last year. Diamond Offshore Drilling currently has the highest return on equity in the oil and gas drilling industry, with an ROE of 17.1%. The company is scheduled to announce its fourth quarter 2012 results on
The Road Ahead
While all this seems promising for Diamond Offshore Drilling, there may be a challenging road ahead for oil and gas in 2013. With a strong support from the government and the private sector, the industry faces strong competition from renewable energy providers. Everyday new research and developments are finding new ways to efficiently produce renewable energy, including Warren Buffet, whose MidAmerican Energy Holding's Co managed to complete constructing two wind farms in
a few weeks ago.
Offshore drilling remains as a risky business, although many believe that 2013 is shaping up to become a strong year for offshore investments. Obama has given leaseholders in the
Gulf of Mexico
an ultimatum: that they must drill or lose their contract. This puts even a greater pressure for companies like Diamond Offshore Drilling to meet the demand for deep water drill rigs.
LaMotte, an advisor at Guggenheim Securities comments that the industry's success is now about demonstrating operational excellence through the training and retention of personnel, health, safety and environmental practices and globalizing the best practices. "Operating offshore isn't just about building the equipment and showing up… it's going to require-quite simply-working smarter."