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

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Presentation on theme: "Real Client Managed Portfolio Diamond Offshore (DO) October 25, 2012 Presented By: Eric Hoffman Patrick O’Donnell Xiaohua (Leah) Xu."— Presentation transcript:

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

2 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

3 Diamond Offshore In the Portfolio February 2008 Purchased 100 shares @ $122.90 for a total cost of $12,290 Give portfolio exposure to oil and drilling sector November 2008 Purchased 50 shares @ $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 shares @ $68.10 As of October 24, 2012 Diamond offshore price: 69.52 Currently have 150 shares with unrealized loss of -.2% Currently represents 3 % of the total portfolio (7.6 of portfolio equity holdings)

4 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 1995. 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).

5 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

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

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

10 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, 2012 32 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

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

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

13 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

14 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

15 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

16 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

17 Revenue Drivers Day Rates Source: DO 10K and 10 Q 2005- 2011 Utilization Rate

18 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)

19 The Fleet

20 The Contracts

21 See Excel “Estimate” The Estimates

22 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?

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

24 Multiples Valuation

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26 DuPont Breakdown

27 Historical Returns

28 WACC Analysis

29 DCF Analysis

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


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