Will Diamond Offshore (DO) Miss Earnings Estimates? - Analyst Blog

Leading oil and gas drilling contractor, Diamond Offshore Drilling Inc. DO, is expected to report its first quarter 2014 earnings on Thursday, Apr 24, before the opening bell. Let's see how things are shaping up prior to the announcement.

In the last quarter, the company's earnings of 96 cents per share surpassed the Zacks Consensus Estimate of 79 cents.The outperformance was mainly backed by higher ultra deepwater and jackup rig utilization. However, the quarter's results decreased 31.9% from the year-earlier earnings of $1.41 per share.

Factors Influencing This Quarter's Results

The most pressing concern for Diamond Offshore, at least in the short term, will be oversupply in the rig market. With multinational energy biggies looking to rein in their skyrocketing capital expenses, the offshore drilling space is likely to see intense competition, as multiple firms run after a single contract. This excess capacity, in turn, could lead to lower utilization or dayrates.   

In the fourth quarter, revenues from the Contract Drilling segment fell 5.7% year over year to approximately $708.0 million, mainly due to a 5.3% decrease in total floaters revenue. These floaters accounted for 93.9% of the total quarterly contract drilling revenue, while jackups contributed 6.1%.

The offshore contract drilling industry is perceived to be a highly cyclical one and the current thought is that rates had already peaked for this cycle back in late 2013. As the sector looks set to enter a cyclical downturn, drillers will prefer to hold on to their higher technology specification rigs, thereby significantly denting the company's fleet utilization and profitability.

Lastly, while most of the drillers boast billion dollar revenue backlogs, these are struggling with idled rigs – or the ones without contracts – in a slack market. On average, just about two-thirds of available deepwater rigs for 2015 have been able to find customers. Even for this year, a number of drilling rigs remain uncontracted. 

Investors do not see an immediate rebound in the sentiment and expect more punishing times ahead. In particular, Diamond Offshore – with its lower-end rigs – look to be in most trouble. This is clearly evident from the high percentage of their float that is sold short. Currently, the short interest ratio for the company is higher than 6.0, suggesting a considerable level of bearishness.

On the flip side, going forward the driller will likely present investors with solid fundamentals given its significant free cash flow potential and clean balance sheet. These would enhance the possibility of further share buybacks and special dividends.

Earnings Whispers?

Our proven model does not conclusively show that Diamondis likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

 Zacks ESP:  The earnings ESP for the stock is -1.45%.

 Zacks Rank: Diamond's Zacks Rank #3 (Hold) when combined with a -1.45% ESP makes surprise prediction difficult.

 We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

 Other Stocks to Consider

Here are some other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Helmerich & Payne Inc. HP, earnings ESP of +0.68% and a Zacks Rank #1 (Strong Buy).

 Pioneer Energy Services Corp. PES, earnings ESP of +40.00% and a Zacks Rank #1.

 Precision Drilling Corp. PDS , earnings ESP of +6.06% and a Zacks Rank #3 (Hold).