There are two issues regarding Transocean that bear monitoring by Fools thinking about investing in the company:
Transocean LTD (NYSE:RIG) remains a defendant in a federal trial relating to the horrendous 2010 tragedy aboard its Deepwater Horizon rig in the Gulf of Mexico. The New Orleans trial will probably be followed by litigation precipitated by the Gulf states, claiming damages from the oil gusher that followed the explosion aboard the rig. The ultimate amount of Transocean’s liability in these actions is hardly clear.
Corporate activist Carl Icahn has the company in his crosshairs, as was was the case with Chesapeake Energy last year. Icahn claims that management “destroyed approximately $11 billion of shareholder value,” primarily through its 2007 acquisition of fellow driller Global Santa Fe. He is proposing that his fellow shareholders support him in demanding a $4-per-share special dividend, along with a say-so in the election of three new board members. Where Icahn’s pursuit will culminate is also open to question.
More than a Diamond in the rough
The Diamond Offshore story is somewhat less complex. A subsidiary of Loews, Houston-based Diamond Offshore Drilling Inc (NYSE:DO) operates 44 offshore rigs, including 32 semi-submersibles, seven jackups, and five dynamically positioned drillships. Of the latter group, four are currently under construction. At present, the U.S. Gulf of Mexico and Brazil are each the home of a baker’s dozen Diamond Offshore rigs, while an actual dozen are deployed in what the company categorizes as “Australasia,” along with three in Africa, and four are in Europe.
For several quarters now, Diamond Offshore’s board has declared special cash dividends of $0.75, in addition to the regular quarterly $0.125 dividend. As a result, the company’s trailing annual yield stacks up to 3.50%, compared with Transocean LTD (NYSE:RIG)‘s zero. Having broached the companies’ metrics, let’s look at some key comparisons among Diamond Offshore Drilling Inc (NYSE:DO), Transocean, and, for added perspective, Noble (NYSE:NE) , another major offshore driller.
| Metric | Diamond Offshore | Noble | Transocean |
|---|---|---|---|
| Market Capitalization | $9.6 billion | $9.6 billion | $18.1 billion |
| Forward P/E | 9.23 | 8.00 | 8.63 |
| PEG Ratio | 0.85 | 0.93 | 0.39 |
| Operating Margin | 32.15% | 22.47% | 18.32% |
| Total Debt/Equity | 32.69 | 54.60 | 79.21 |
| Trailing Annual Yield | 3.50% | 0.53% | N/A |
Sources: Yahoo! Finance and TMF calculations.
The Foolish takeaway
It’s an intriguing set of metrics, I think you’ll agree. My conclusion, having trod offshore rig-drill floors immediately upon departing from graduate school, is that Diamond Offshore Drilling Inc (NYSE:DO) is the first of the companies whose shares I’d drop into my portfolio. That’s based upon its yield (I used the trailing percentage to reflect the effects of the special dividends), its operating margin, and its balance sheet. Indeed, Diamond’s cash and its total debt are essentially equal, so the company is net debt free.
The article Diamond Offshore Sparkles in the Deepwater originally appeared on Fool.com is written by David Smith .
Fool contributor David Smith owns shares of Chesapeake Energy and Transocean. The Motley Fool recommends Loews and National Oilwell Varco; owns shares of Loews, National Oilwell Varco, and Transocean; and has options on Chesapeake Energy.
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