Diamond Offshore: The Margin Of Safety Is Too Small – Avoid – Seeking Alpha

Thesis:

The margin of safety in Diamond Offshore (NYSE:DO) is lacking due to issues with cash flow, minimal earnings, and high interest expense. The technical overview is negative - the company has significant debt, minimal earnings, and no dividend. The best course of action for investors is to wait and re-evaluate in the future.

Current Earnings & Outlook: (via Conference Call)

The conference call presented few bright spots for investors looking for good news. The earnings are weak and management presents a cloudy forecast for the near term.

Debt & Cash Flow:

When we compare DO against Transocean (NYSE:RIG), the level of cash flow vs. the interest expense to the debt is favorable with Transocean. Additional analysis on Transocean.

Based on the interest expense and cash flow, Diamond Offshore lacks the margin of safety one would like to see.

It would be a much more attractive situation if the company was creating enough cash flow to comfortably pay the interest expense many times over. That is not the case here. It raises the level of risk, and without near-term catalysts, we have a situation where the risk outweighs the reward.

Cash and Liquidity:

Again, the balance sheet and lack of liquidity in the company is lacking. Ideally, we would like to see a current ratio closer to 2x the debt. As a value investor, DO does not have the balance sheet strength and liquidity that would make the shares more attractive.

DO Market Cap data by YCharts

Earnings:

As we see below, the earnings for the company are minimal due to the current environment in the sector. Even if one was confident of a turnaround in the sector as management mentioned on the conference call in 2019/2020, the debt is still a concern.

At the current time, the earnings are not strong enough when considered against the sizeable debt load. Earnings are expected to be .82 in 2017 and .14 in 2018 (via IBD/ Marketsmith).

Again, the earnings provide little to minimize the risk in the shares.

RIG data by YCharts

Technical Overview:

On a technical basis, the company is performing much worse than Transocean, as Diamond Offshore has a relative strength of 5 (meaning it is underperforming 95% of stocks in the market), but RIG has a RS of 54, which is significantly higher and also it is still above its 200-day moving average.

Diamond Offshore has completely broken down technically and is well below all the significant moving averages and, as we see below, has traded down on significant volume. So, unfortunately, I see very little optimism in the technical outlook. In my opinion, the volume represents institutional pessimism on the shares and present a continued overhang on the share price.

Dividends:

The company is currently not able to pay a dividend to investors. If the valuation was more attractive, this could be overlooked. However, this is just another reason why I find it hard to be interested in the shares at this time.

Investment Recommendation:

I found RIG to trade at a discount to valuation and therefore recommended a corresponding strategy (Getting Paid to Wait on RIG) for investors interested in participating in the shares and who wanted to take some risk.

Unfortunately, due to the lack of catalysts and safety, I see no attractive options or strategies in DO. Investors should wait and see if the situation improves and re-evaluate at that time.

Conclusion:

Diamond Offshore is not attractive enough based on earnings, debt, technical factors, lack of dividend, and cash flow for value investors. Due to lack of catalysts, the recommendation is to wait and re-evaluate the shares if the situation changes.

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.

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Diamond Offshore: The Margin Of Safety Is Too Small - Avoid - Seeking Alpha