Diamond Offshore Wins Over Petrobras In Court – Seeking Alpha

Diamond Offshore (NYSE:DO) has just announced that the court upheld the injunction regarding the company's Ocean Valor contract with Petrobras (NYSE:PBR). According to Diamond Offshore's 8-K, Petrobras has the right to seek to appeal the ruling in the Superior Court of Justice. This is a major win for Diamond Offshore, which continues to get the dayrate from the Ocean Valor contract. The news of Ocean Valor's contract cancellation was a major downside catalyst for Diamond Offshore shares back in September 2016.

There is a lot at stake for Diamond Offshore. Ocean Valor was originally scheduled to work until October 2018 at a dayrate of $455,000. The news is especially refreshing given the current state of the floater market, which remains under heavy pressure due to low oil prices.

As I stated in my previous article on Diamond Offshore, the stock looks like an interesting bet around $15 due to strong support at this level and a clear plan. If the stock breaks the support, you can bail out with a small loss.

The news on the Ocean Valor should provide additional support for the company's shares. At the same time, the industry situation remains tough. Brent failed to go through the major resistance at $57.50 and corrected significantly, further postponing any material recovery in the floater segment of the offshore drilling market.

Saudi Arabia recently hinted that it might get out of the production cut deal after six months if other market participants (especially U.S. shale companies) get too much out of it without committing anything. This is worrying news for the whole offshore drilling market, and for the floater segment in particular as it needs higher prices than the jackup segment in order to see increased contracting activity and better dayrates.

The current backlog remains Diamond Offshore's core strength. However, as time goes by, the company will eat through the backlog and future prospects look rather bleak, like for every offshore driller. I remain cautiously optimistic on the company due to the backlog and the quality of the management team, which was the only one that called the current crisis right from the start and acted accordingly.

At the same time, oil prices are a source of major worry. In my view, another leg down in oil prices (if it happens) will certainly take Diamond Offshore shares below $15. It might even cause a wave of selling, triggering the protective stop orders of both speculative and longer-term-oriented traders and investors.

Besides oil prices, Diamond Offshore will have to deal with several contracts that end this year. The contracts of two older semi-subs, Ocean Guardian and Ocean Patriot, end in April 2017 and October 2017, respectively. Diamond Offshore's management has repeatedly stated that old assets can find their niche in the market. This year, the management team will have a chance to prove its words or if the two semis will have to join the fleet of cold-stacked rigs, which currently consists of 10 rigs.

There are several other rigs whose contracts end in 2017: jackup Ocean Scepter and semis Ocean Monarch and Ocean Victory. In short, Diamond Offshore will have to find additional work for at least some of these rigs or its shares will find themselves under increased pressure.

I have often written about the "survivor group," which, in my view, consists of Diamond Offshore, Rowan (NYSE:RDC), Ensco (NYSE:ESV), Transocean (NYSE:RIG), and Noble Corp. (NYSE:NE). "Survival" here means that the companies will emerge out of the current downturn without material changes to the capital structure, which involve heavy dilution or a complete wipeout of shareholders. However, "survivor group" member status does not protect a company's shares from downside.

I continue to believe that the whereabouts of the $15 level present a decent opportunity to bet on Diamond Offshore shares, either for a short-term or a longer-term trade. However, an investor or trader should keep risks in mind, choose a comfortable entry price and size the position accordingly. The whole industry remains under great pressure, and there are little if any signs of a rebound.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DO over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the abovementioned stocks.

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Diamond Offshore Wins Over Petrobras In Court - Seeking Alpha