You have to give Diamond Offshore (NYSE:DO) credit. Despite an absolutely brutal market for offshore rigs, the company was able to not only soundly beat estimates for the quarter, but it was able to actually increase earnings. That's something that almost no other rig owner has been able to say for the past several years.

Here's a look at how Diamond was able to pull off this rather remarkable feat, and how management thinks the position it is in today will help to make it an even more competitive company in the coming years.

Image source: Getty Images.

*in millions, except per-share data. Source: Diamond Offshore earnings release.

Based on the dynamics of the oil and gas industry today, the last group of companies you might expect to see an uptick in earnings is with offshore rig companies. Yet that is exactly what happened with Diamond this past quarter. That net income gain is a little larger because of an early termination fee that added $0.28 per share to the bottom line, but even after we pull out that gain it was still an impressive gain over the two comparable quarters.

There are some gains that are sustainable, and some that aren't. One of the most notable gains was in its Mid-water floater segment. However, this is the segmenet where it netted that one time contract termination gain. The one that is truly impressive, though, is the gains for its ultra deepwater fleet. Two rigs -- the Ocean GreatWhite and Ocean BlackLion -- both started 3 year contract terms.

The Ocean GreatWhite is in a unique position because the job it was hired to do was drill in Austrailia's Bight Basin for BP (NYSE:BP). BP has since suspended operations there, however, so the two have worked out a hybrid standby contract that will remain in place until BP can find a place to put this ship to work.

Source: Diamond Offshore earnings release. Author's chart.

The increase in revenues and the declines in operating costs have also freed up cash flow for the company, which is enabling it to pay down some debt. This past quarter alone Diamond was able to pay back $188 million in short term borrowings. With little in terms of capital spending in the coming quarters, the company should be able to throw off quite a bit of cash for either paying down debt or even returning that cash to shareholders. Considering the depressed share price, it wouldn't be shocking to see Diamond buy back some stock.

For the most part, CEO Marc Edwards' comments were on all of the action items that have happened as of late, notably the contracting of several rigs. While that does give the company a decent boost to the income statement now, Edwards also explained how there are some other advantages to being in this position for the future.

Although the next few years will be challenging for offshore drillers, we have uniquely positioned Diamond Offshore to take best advantage of a recovery either in '19 or 2020.

For example, our sixth-generation fleet is contracted through 2019. Our clients have a strong preference for rigs that have recently completed other work. In other words, rigs that are hot. They do not want to take the financial or time risk of qualifying a rig which has been stacked for a lengthy period. We are already seeing some tenders illustrate a strong preference for rigs that are hot. As the market recovers, our rigs will be finishing up their contracts and will therefore be the most attractive to our clients.

Diamond Offshore has done a great job of transforming itself over the past several years. It has gone from a company with an old fleet of rigs with little to differentiate itself from the pack to a young, capable fleet that is working on some innovative ideas like its partnership with General Electric for its pay for performance blow out preventors and its new generation design for ultra deepwater rigs.

With a decent chunk of its fleet contracted out over the next several years, it looks as though Diamond will be in a much better position than its peers to handle the ups and downs of the market. With shares trading at very cheap prices today, it may be a long term investment worth putting on your radar.

Tyler Crowe and The Motley Fool own shares of General Electric. The Motley Fool has a disclosure policy.

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