Real Client Managed Portfolio Diamond Offshore (DO) October 25, 2012 Presented By: Eric Hoffman Patrick O’Donnell Xiaohua (Leah) Xu

Agenda Diamond Offshore in the Portfolio Macro-Economic Review Stock Market Prospects Diamond Offshore (the Business) Financial Analysis Financial Projections Application of Financial Tools Recommendation

Diamond Offshore In the Portfolio February 2008 Purchased 100 $ for a total cost of $12,290 Give portfolio exposure to oil and drilling sector November 2008 Purchased 50 $72.96 for a total cost of $3,648 September 2009 Written call option exercised, sold 100 shares at adjusted price of $76.25 totaling $7,625 Strike price adjusted to $76.25 from original strike price of $80.00 due to a special cash dividend of $1.875 paid twice over the holding period of the option Realized loss of $4,665 November 2010 Purchased 100 $68.10 As of October 24, 2012 Diamond offshore price: Currently have 150 shares with unrealized loss of -.2% Currently represents 3 % of the total portfolio (7.6 of portfolio equity holdings)

The Company The company originally started as Diamond M Drilling company. In 1980, Loews Corp bought the distressed company’s assets. The company was renamed to Diamond offshore and held private until Currently one of the largest off-shore drilling corporations Headquartered in Huston, TX – Global presence (primarily in South America, Middle East, Africa, Asia and Pacific Asia) 98% owned by 447 institutional and Mutual fund shareholders 50.4% Owned by Loews Corporation (Jim Tisch).

The primary driver of the drilling market is energy consumption. – Easier for DO to earn contracts – Determines capacity/daily use rates of rigs – Greater demand for product naturally shifts power from buyer to supplier. Macro Economic Review

Source: U.S. Energy Information Administration, International Energy Outlook 2011 :

Source: U.S. Energy Information Administration, International Energy Outlook 2011

Company Overview Leading global offshore oil and gas drilling contractor Customer Base major independent oil and gas companies government-owned oil companies Capacity: 44 offshore rigs as June 30, semisubmersibles 7 jack-ups 5 dynamically positioned drillships 4 of them are under construction: delivery expected in second and fourth quarters of 2013 and the remaining two in the second quarter of 2014 Source: Form 10Q,Diamond offshore, FY 2012

The fleet Source: Form 10k,Diamond offshore, FY 2011

Stock performance BP oil spill in the Gulf of Mexico Source: Yahoo Finance, dates from 1/1/08 – 10/24/12

Competitors Transocean (RIG): 9 Billion sales Noble Corporation (NE): 3 Billion sales Ensco PLC (ESV): 4 Billion sales Source: Yahoo Finance, dates from 1/1/08 – 10/24/12

Business Strategy Cost Leadership – Reduced Equipment downtime – Safety Upgrade fleet to meet customer demand for advanced efficient and high-tech rigs – Acquire or build new rigs at attractive price – Enhance the capabilities of existing rigs at a lower cost and reduced construction period Take advantage of industry cyclicality to make opportune investments at times of distress or when others are unwilling or unable to invest – 2009: acquired two new-build ultra-deepwater, dynamically positioned semisubmersible drilling rigs – 2010: entered into three separate turnkey contract with Hyundai for three ultra-deepwater drillships – 2012: announced the construction of a moored semisubmersible drilling rigs that will be designed to operated in water depth up to 6,000 feet Source: Form 10-K,Diamond offshore, FY 2011

Business Model Obtain contract through competitive bidding processes / Direct negotiation Type of Contract Exploratory: to find new oil or gas deposits Development: to prepare the discovery for production Duration of Contract Well-to-well contract Term Contract: fixed period of time Revenue Majority: fixed dayrate Incentive bonus based upon performance

Revenue Drivers Day Rates – Ultra-deepwater and deepwater: strong successful exploration and development programs offshore Brazil and West Africa – mid-water floater: stable – Jack-up: Decline Utilization Rate : – the actual percentage of time in a year a rig would be utilized

Revenue Drivers Day Rates Source: DO 10K and 10 Q Utilization Rate

Financial Analysis So…How does this company make money? Jack ups (10 – 350 Ft) Intermediate Submersibles (4000 ft) Deep-water Drillships/Submersibles (greater than 4000 ft)

The Fleet

The Contracts

See Excel “Estimate” The Estimates

Customers: DO’s five largest customers in the aggregate accounted for 62% of our consolidated revenues primarily lead by Petrobras and OGX (who accounted for approximately 35% and 14% of DO’s consolidated revenues in 2011). Location: – 40% North America – 20% South America – 20% Africa/ Europe/Mediterranean – 20% Asia/Pacific Asia So where is the revenue coming from?

Depreciation Bad Debt Expense Impairment Sell for Loss Transactions Foreign Exchange So where is the revenue leaving?

Multiples Valuation

DuPont Breakdown

Historical Returns

WACC Analysis

DCF Analysis

Recommendation: Hold Current Stock Price:$69.52 DCF Valuation:$67.79 Comparable Companies Valuation:$67.06 Recommendation: Hold 150 shares