Goldman Sachs Downgrades Diamond Offshore (DO) to Sell

Goldman Sachs downgraded Diamond Offshore (NYSE: DO) from Neutral to Sell with a price target of $26.50 (from $36.00) as fundamentals for offshore drillers continue to worsen, with more rigs getting idled, dayrates declining and new rigs entering supply.

Analyst Waqar Syed cited several reasons for the downgrade: (1) DO has one of the oldest fleets in the industry with an average age of 21.3/ 33.3 years for the floaters/ jack-ups. (2) DO has 5 rigs (14% of active fleet) which are currently hot stacked or being actively marketed, and 16 rigs (44% of active fleet) that are coming to the end of their contracts in 2014 and 2015. Per the current offshore rig delivery schedule, 41/81 of industry’s under-construction floaters/jack-ups are expected to enter the supply in 2014 and 2015. Incoming supply equals 17% of currently active floaters and 20% of active jack-ups. The older rigs would compete with these new rigs, putting downward pressure on dayrates. (3) The aforementioned challenges present a risk to DO’s dividend. In 2015, we forecast FCF of $226mn, which does not cover the usual $480mn dividend payment. Although DO’s current dividend yield at 8.8% looks attractive, we believe the risk of a dividend cut exists as DO struggles with re-contracting its older rigs. (4) We estimate that DO’s EPS reduces from $3.18 in 2014 to $2.00, vs. consensus estimates of 3.11/2.31 (+2%/-13%).

For an analyst ratings summary and ratings history on Diamond Offshore click here. For more ratings news on Diamond Offshore click here.

Shares of Diamond Offshore closed at $39.07 yesterday.

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