Why Is Diamond Offshore Drilling (DO) Down 55% Since Last Earnings Report?

It has been about a month since the last earnings report for Diamond Offshore Drilling (NYSE:DO). Shares have lost about 55% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Diamond Offshore Drilling due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Diamond Offshore’s Q4 Earnings Beat Estimates, Decline Y/Y

Diamond Offshore incurred fourth-quarter 2019 adjusted loss of 45 cents per share, narrower than the Zacks Consensus Estimate of a loss of 66 cents. However, the figure was wider than the year-ago loss of 42 cents.

Total revenues amounted to $276.4 million, up from $233 million in the year-ago quarter. The figure also beat the Zacks Consensus Estimate of $249 million.

The better-than-expected results were primarily aided by higher rig utilization and improved operational uptime on most of its black ships. The positives were partially offset by lower average day rates, higher operating expenses and Ocean BlackHornet’s upgrading time.

Despite better-than-expected results, the company’s shares plunged more than 9% yesterday as it expects 2020 cash flow to be in the negative territory.

Operational Performance

The rigs recorded an average day rate of $264,000, lower than $315,000 in the prior year. Operational efficiency in the reported quarter was 94.7% compared with 95.4% in the year-ago period. Rig utilization jumped to 59% from 46% a year earlier.

In the fourth quarter, Contract Drilling revenues rose 14.4% year over year to approximately $258.7 million.

Total operating expenses in the quarter were recorded at $325.2 million, higher than $269.8 million in the year-ago quarter, primarily due to higher contract drilling costs. Operating loss was recorded at $48.9 million, higher than the year-ago period’s $37.3 million.

Backlog

As of Jan 1, 2020, the company had a total contracted backlog of $1.6 billion. It secured around $50 million of additional backlog in the quarter under review.

Financials

In 2019, the company’s capital expenditures were $326.1 million, higher than the 2018 level of $222.4 million.

As of Dec 31, 2019, Diamond Offshore had approximately $156.3 million in cash and cash equivalents, while long-term debt totaled $1,975.7 million. The debt-to-capitalization ratio was 37.9%.

Guidance

For first-quarter 2020, the firm anticipates contract drilling revenues in the range of $205-$215 million. Contract drilling expenses for the first quarter of 2020 is expected between $185 million and $195 million. G&A expense through the quarter is expected to be $17 million. Moreover, its cash capital budget guidance for the full year is estimated in the range of $190-$210 million.

The company expects to start drawing from its revolver facility in second-quarter 2020. This year, the company’s cash flow will likely be in the negative territory.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -25.42% due to these changes.

VGM Scores

At this time, Diamond Offshore Drilling has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Diamond Offshore Drilling has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.