Diamond Offshore: The Slide Continues – Seeking Alpha

Image: Ocean Onyx Courtesy: Offshore Energy Today

Diamond Offshore (NYSE:DO) is one of the offshore drillers that I am regularly following on Seeking Alpha.

As I said in my preceding articles, the company presents definitive weaknesses when it comes to its rig fleet, but up until now, Diamond Offshore had its balance sheet quite in order. The fourth quarter is putting a dent on that idea, and I will explain it later in this article.

Diamond Offshore continues to shrink in size, and it is taking a severe toll on its balance sheet, the company is now expecting only $210 million (midpoint) for the first quarter of 2020.

Despite one substantial asset segment called the moored assets class right now (e.g., Ocean Onyx, Ocean Apex, etc.), it seems that the backlog is disintegrating in front of our eyes. Now, less than $1.6 billion remaining and only $50 million added in the last fleet Status.

Looking at the overall situation, they are not more advanced than a quarter ago.

Despite some rare contracts, I am far from being impressed by the pace and the strength of the "recovery".

Thus, I recommend being extremely cautious when it comes to investing in this sector until a time when the recovery is noticeable in the balance sheet with better margins and free cash flow, which is not what is expected by the company in 2020.

Meanwhile, trading the offshore drilling sector short term is highly recommended and perhaps the only way to make a decent profit.

Data by YCharts

Note: Diamond Offshore is 53% owned by Loews Corp. (NYSE:L), which gives some credibility and safety long term.

1,975

1,976

Note: Most of the data indicated above come from Morningstar and company release.

1 - Quarterly revenue of $276.4 million in 4Q'19

Diamond Offshore posted $276.34 million in revenues in the fourth quarter of 2019, an increase of 18.9% when compared to its revenues of $232.522 million in the same period last year.

Diamond dropped to a $74.770 million loss in its 4Q 2019 (EPS $0.54 per share) from a loss of $79.207 million in the prior-year quarter. Adjusted loss per share was $0.45.

During the third quarter of 2019, the average company dayrate was $264K/d, a decrease compared to $315K/d in the corresponding quarter of last year. Utilization was up to 59% from 46% in 4Q'18. However, the dayrate average is up a little sequentially, suggesting some support.

Marc Edwards, the CEO, said in the conference call:

2019 was an unusually heavy CapEx year for Diamond as we focused on strategic upgrades for our most marketable rigs. We believe these investments will be beneficial to Diamond in the long run. Moving forward, we will focus on preserving liquidity and limiting CapEx into 2020 and beyond.

It surmises the issue and why Diamond Offshore is struggling financially with a continual loss in free cash flow, as I have shown below.

2 - Free Cash Flow is a loss of $53.0 million in 4Q'19

Diamond Offshore is generating negative free cash flow yearly. The loss in FCF annually ("TTM") is $369.972 million, with a loss of $53 million in the fourth quarter of 2019.

As we can see, Diamond Offshore is bleeding free cash flow regularly despite the recent new contracts awarded, confirming an uptrend in daily rates. The issue is that the loss in free cash flow is not related to an increased CapEx but a decrease in profit margin.

Scott Kornblau, the CFO, said in the conference call:

Full year 2019 capital expenditures of $326 million came in approximately $45 million less than mid range of the revised guidance of $360 million to $380 million given on our previous calls.

During 2020, Diamond Offshore is planning to undergo three 5-year special surveys that require zero dayrate time and are generally costly.

The first one is already complete as the drillship Ocean BlackRhino spent about two weeks in January performing its survey.

The second one is the drillship Ocean BlackLion, which is scheduled to go into a shipyard in the latter half of the first quarter to conduct its survey and the automation upgrades.

Also, during 2020, the drillship Ocean BlackRhino will go into a shipyard to perform similar upgrades to the other black ships and prepare for its 2021 contract commencement in West Africa.

3 - Quarterly backlog history and discussion

Diamond Offshore released its fleet status on February 10, 2020.

What happened since the last fleet status?

The company added a total of over $50 million in the backlog.

Below is the backlog repartition per year:

And below is the contract backlog repartition per year indicating that the drillship segment is the most significant at $994 million in the contract backlog:

The backlog now stands at $1.6 billion as of January 1, 2020, with about ~$664 million in 2020 (not including the effect of the projected out-of-service time for the remainder of the year).

Diamond's average dayrate in 4Q 2019 dropped to $264k/d from $315K/d in the fourth quarter of 2018. However, utilization increased to 59% from 46% in 4Q 2018.

From PR

CEO Marc Edwards said on the conference call:

It is clear that since the trough in 2016, day rates have risen for all asset classes. However, upward pricing momentum remained slow due to ongoing rig capacity overhang, especially in the drillship market as well as the short-term nature of the awards.

4 - Net Debt is $1.82 billion in 4Q'19

Net Debt is now $1.766 billion, with a net debt-to-EBITDA ratio of 23.8x, which is very high and means that the company can repay its net debt in about 24 years based on its EBITDA ("TTM"), which is $76.414 million.

Scott Kornblau said in the conference call:

We finished 2019 with $156 million of cash and nothing drawn on our revolver. However, we soon expect to start drawing on our revolver likely in the second quarter and we expect to be cash flow negative during 2020 and end the year with a drawn revolver balance

The street did not react well to this news, and the stock plunged significantly.

Diamond Offshore's recent results were again not inspiring with a contract backlog continuing to degrade now below $1.6 billion (estimated at $1.57 billion in February). However, they were above analysts' expectations. Still, reading between the lines push the market to think twice before investing in this stock, especially with first-quarter 2020 anticipated contract drilling revenues in the range of $205-$215 million.

As I said above, 2020 is going to be another "expensive" year in terms of CapEx with about three to four drillships 5-year special survey SPS. However, for 2020, the company anticipates CaPEx to be $190 million and $210 million. I am a little skeptical and find it a little light.

The big issue with Diamond Offshore is that the company is accumulating free cash flow losses regularly and warn that it will be the same in 2020. Worse, the company will have to tap into its revolver after indicating that cash flow will be negative in 2020. Total cash is now well below what it was the same quarter a year ago.

Technical Analysis

DO is showing a descending channel pattern with successive lower lows, which is bearish. Line support is at about $3.85 now, and line resistance is $7.3. However, I see a new intermediate resistance at $5.00 now.

The trading strategy is to buy and accumulate at around $3.90 or lower, assuming no damaging news coming from the oil prices. The first sell target is $5, at which point it is a good idea to take about 20% off the table.

If oil prices recover from the coronavirus' Black Swan event, I believe DO will have a resistance breakout at $5 with a potential retest at $7.00 later.

The worst-case scenario could be a mounting scare about the virus and a significant drop in oil prices. In this bearish case, the next support is around $2.50. Trading DO is risky, watch oil prices like a hawk.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Join my "Gold and Oil Corner" today, and discuss ideas and strategies freely in my private chat room. Click here to subscribe now.

You will have access to 57+ stocks at your fingertips with my exclusive Fun Trading's stock tracker. Do not be alone and enjoy an honest exchange with a veteran trader with more than thirty years of experience.

"It's not only moving that creates new starting points. Sometimes all it takes is a subtle shift in perspective," Kristin Armstrong.

Fun Trading has been writing since 2014, and you will have total access to his 1,865 articles and counting.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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 am trading short term DO

Go here to see the original:

Diamond Offshore: The Slide Continues - Seeking Alpha