Diamond Offshore Drilling Quarterly Valuation – August 2014 $DO

168px-Diamond_Offshore.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Diamond Offshore Drilling (DO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Diamond Offshore Drilling, Inc. is a global offshore oil and gas drilling contractor. The Company has a fleet of 44 offshore drilling rigs, consisting of 32 semisubmersibles, seven jack-ups and five dynamically positioned drillships, four of which are under construction. The Company’s jackups include Ocean King, Ocean Nugget, Ocean Scepter, Ocean Spartan, Ocean Spur, Ocean Summit and Ocean Titan. The Company’s Deepwater Semisubmersibles include Ocean Alliance, Ocean America, Ocean Apex, Ocean Onyx, Ocean Valiant, and Ocean Star. Ultra-Deepwater Semisubmersibles include Ocean Valor, Ocean Courage, Ocean Monarch, Ocean Baroness, and Ocean Confidence. Ultra-Deepwater Drillships include Ocean BlackLion, Ocean BlackRhino, Ocean BlackHornet, and Ocean Clipper. Mid-Water Semisubmersibles includes Ocean Winner, Ocean Quest, Ocean Concord, Ocean Guardian, Ocean Whittington, and Ocean Yorktown.
DO Chart

DO data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - FAIL

Valuation Summary

Key Data:

Recent Price $43.21
MG Value $0.00
MG Opinion Overvalued
Value Based on 3% Growth $62.88
Value Based on 0% Growth $36.86
Market Implied Growth Rate 0.73%
Net Current Asset Value (NCAV) -$12.68
PEmg 9.96
Current Ratio 2.60
PB Ratio 1.30

Balance Sheet – 6/30/2014

Current Assets $2,076,900,000
Current Liabilities $800,200,000
Total Debt $2,244,300,000
Total Assets $8,362,300,000
Intangible Assets $0
Total Liabilities $3,815,400,000
Outstanding Shares 137,150,000

Earnings Per Share

2014 (estimate) $2.60
2013 $3.95
2012 $5.18
2011 $6.92
2010 $6.87
2009 $9.89
2008 $9.43
2007 $6.09
2006 $5.09
2005 $1.84
2004 -$0.06

Earnings Per Share – ModernGraham

2014 (estimate) $4.34
2013 $5.66
2012 $6.89
2011 $7.78
2010 $7.96
2009 $7.83

Dividend History

DO Dividend Chart

DO Dividend data by YCharts


Diamond Offshore Drilling qualifies for the Defensive Investor and by default also qualifies for the Enterprising Investor.  The Defensive Investor’s only concern is the lack of sufficient earnings growth over the last ten years.  The Enterprising Investor has an issue with the high level of debt relative to the net current assets as well as the lack of earnings growth over the last five years.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $7.96 in 2010 to an estimated $4.34 for 2014.  This demonstrated drop in earnings does not support the market’s implied estimate of 0.73% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Diamond Offshore Drilling (DO)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Diamond Offshore Drilling (DO) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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