Diamond Offshore Upgraded At Iberia, Bad News Seen As 'Priced In'

• Diamond Offshore Drilling Inc DO shares have lost 40 percent year-to-date, declining from a high of $37.23 on January 2.
• Iberia Capital Partners’ Robert MacKenzie upgraded the rating on the company from Underperform to Sector Perform, while raising the price target from $18.50 to $22.
• Following the decline in the company’s shares, the bad news already seems to be priced in, MacKenzie said.

Diamond Offshore reported robust 3Q results, beating revenue expectations on strong operational uptime on its drillships. Moreover, OpEx was well below the guidance due to cost controls.

With limited demand visibility, the sector is expected to remain challenged over the next 18 months and maybe beyond. Analyst Robert MacKenzie believes, however, that most of the bad news has already been priced into the stock.

“Almost all of the company's aging, less capable rigs have been either retired or cold stacked, and we believe that we are currently through the bulk of early terminations, barring another significant leg down in the price of oil,” MacKenzie wrote.

He added that Diamond Offshore's higher-spec, UDW rigs are well-contracted into 2019-2020 at apparently attractive rates that are in the $400k per day range.

There seems to be a bifurcation in the market between high-spec drillships and 4th- and 5th- generation assets. The 4th-gen market is likely to recover before the 5th-gen market, particularly if retirements or scrapping gain momentum.

Diamond Offshore has retired 10 rigs and has 12 rigs, including 5 jack-ups and 7 semis, cold stacked. Many of the cold stacked rigs are unlikely to ever return to the active fleet, since most are more than 30 years old, MacKenzie mentioned.