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Morningstar | Diamond Offshore Drillers Remain Challenged by Low Utilization and Pricing

Diamond Offshore commands an offshore drilling fleet that includes 14 semisubmersibles, four dynamically positioned drillships, and one jack-up stationed across each of the prominent offshore markets. Before the downturn, it put together industry leading returns on capital by opting for fleet upgrades rather than costlier newbuild construction, and therefore capitalized on the low-cost nature of its older fleet. Its fleet still swings toward the older end of the spectrum, however, the fruitful returns it once enjoyed have largely been diminished. Poor timing on newbuilds combined with supply overhang created by cratering oil prices have inhibited Diamond returns.With shale producers lowering industry breakevens, investment in offshore projects has weakened and consequently challenged fundamentals for offshore drillers. Certainly, offshore stakeholders have worked toward lowering breakevens, and made considerable progress, but it remains that only a select portfolio of offshore projects are competitive with shale. Long payback periods and high cost of investment continue to plague the prospect of offshore investment. As a result, the number of opportunities has dried up for offshore drillers, and we expect it will be a while before they return. Because day rates are mired by a flood of excess supply, we don’t expect returns to reach value accretive marks through our midcycle. Further, we expect drillers will fall short of market balancing attrition. This should equate to floater utilization of 66% and jackup utilization of 66%. Moreover, we believe demand will be arrested through 2021 with our “lower for longer” oil price forecast of $60/bbl Brent. Without materially higher investment in offshore projects, we expect driller performance will suffer for many years to come. Therefore, we don't believe drillers offer much upside to investors.