Offshore driller Diamond Offshore Drilling Inc. (DO: 65.24 +0.98 +1.53%)disposed of its 350-feet high-specification jackup Ocean Shield to Ensco plc(ESV: 41.06 -0.03 -0.07%) for $186 million in cash, reflecting the company’s intention to utilize the cash in the deepwater drilling assets.The sale of Ocean Shield also reveals drilling contractors’ interest in deepwater investments, despite a cloudy drilling scenario due to the Gulf of Mexico (GoM) moratorium. Recently, Noble Corp. (NE: 32.77 +0.13 +0.40%) agreed to purchase FDR Holdings Ltd (aka Frontier) for $2.16 billion in order to emphasize its position in the U.S. Gulf.
Ocean Shield has a contract with Apache Corp. (APA: 87.36 +0.31 +0.36%) in Australia, which will last through May 2011 and Ensco will assume the contract.
Diamond is highly leveraged to the deepwater markets through its fleet of high-specification and generates most of its revenue from high-spec deepwater and ultra-deepwater rigs. As of the end of first quarter 2010, the company has significant near-term contracts on the deepwater front, which should rein its downside risks and make it a defensive name in a weakening market.
However, Diamond is experiencing dayrate pressure in the deepwater segment where it lacks significant increase in tendering activity for projects. Moreover, improvement in the existing fleet and the addition of new rigs on a selective basis has been the company’s long-term strategy.
As the offshore drilling is still lucrative, particularly the deepwater end, the company needs a financial back up to strengthen its position in this space. Hence, cash generated from this deal can be used to upgrade outdated floaters, although we believe rates in the deepwater/midwater markets need an upswing before these upgrades make economic sense. Diamond also increased this year’s capital expenditure guidance by $70 million to $510 million for alterations needed on the Ocean Valor, the Ocean Baroness and the Ocean Clipper, each of which were recently awarded long-term contracts with Petrobras in Brazil.
Consequently, the Ocean Shield sale announcement will not only provide capital for the modification of the existing assets, but will also enable the company to follow financial discipline making it one of the best-capitalized companies in the industry.
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