Morningstar | Contract Backlog Continues to Grow as Revenue Remains Stagnant; FVE Unchanged
No-moat Diamond posted sequentially flat revenue as a 3% uptick in the company’s average rig count was offset by a 2% decline in day rates. Adjusted operating margin slipped to -19% from -15% in the fourth quarter owing chiefly to these weaker day rates. These results were largely in line with our expectations and management’s guidance. Dayrates for rigs continues to hover around the price floor, and our fair value estimate remains unchanged. Loss per share came out to $0.53, below EPS for the first quarter of 2018, driven down by lower revenue.Exploration budgets for Diamond’s largest customers have been expanding as company proven reserves have been depleting, a trend which should raise industry demand and drive up dayrates as most offshore drillers are already operating at an efficient utilization of their fleet. This hypothesis is supported by the most recent Diamond fleet status report dated April 29, showing a deepening in the driller’s backlog well into 2023 for its ultra-deep-water drillships. Diamond management also attributed the wins to strong execution on recent contracts, owing to the company’s efficiency initiatives over the past few years.
While increasing demand in 2019 will likely continue to drive up contract backlog, we are hesitant to take a bullish perspective in our valuation as Diamond continues not to disclose the rates on new contracts, which has been the industry trend since rates have declined, signaling rates are not yet attractive enough to disclose again (although management guided that rates are "meaningfully" above current spot rates, they are almost certainly a large step down from prior contract rates). In our belief, the industry is not yet at the inflection point where dayrates trend upward, and the further out the backlog extends, the longer these floor rates will continue to be locked in (assuming price is set during initial contract negotiations) and the upside from positive price swings will be limited.
Diamond Offshore Drilling provides contract drilling services to the energy industry around the globe. The company's fleet enables it to provide services in the floater market on a worldwide basis. The company's contracts to provide offshore drilling services vary in their terms and provisions. The principal markets for the company's offshore contract drilling services are: the Gulf of Mexico, including the U.S., and Mexico; South America, principally offshore Brazil, and Trinidad and Tobago; Australia and Southeast Asia, including Malaysia, Indonesia, Myanmar and Vietnam; Europe, principally offshore the U.K., and Norway; East and West Africa; and the Mediterranean.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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