Diamond Offshore Drilling, Inc.April 21, 2009

Alan Lagunov, Pragnesh Podar, Gana Raman, Bilal Rathore

Offshore Drilling

• Diamond Offshore’s job is to drill and complete wells at the direction of customers – Completion in industry terms means preparing the

well for production • Rigs come with a full crew and the equipment

and supplies needed to carry out the assigned task– May range from a few days to multiple years– Crews live on rigs for 14 days, then get 14 days off

Business Description

• Provides contract drilling services to the energy industry globally– Oil and gas

• Leading company in deepwater drilling• One of the world’s largest fleets of offshore

drilling rigs– 30 semisubmersibles– 14 jack-up units– 1 drill ship

Company History• Incorporated in Delaware in 1989• Diamond Offshore is a collection of three

companies– Ocean Drilling and Exploration Co. (ODECO)– Zapata Petroleum Corp.

• Partnership which included George H.W. Bush• Purchased by Artheusa Ltd. in early 1990s

– Diamond M Drilling Co.• After oil collapse of 1980s, Loews bought assets

of Diamond M (1989)

Company History

• In 1992, Diamond M bought out ODECO• In 1993, changed name to Diamond Offshore

Drilling, Inc.• In 1995, Loews sold 30% of the company in an

IPO – Wholly owned subsidiary of Loews prior to that

• In April 1996, acquired Artheusa Ltd.• In February 2009, added to the S&P 500 index

Types of Rigs

• Semisubmersibles (30)– Used in water depths of 1,100 to 10,000 feet– Consist of an upper working and living deck resting on

vertical columns connected to lower hull members approximately 55 feet to 90 feet below the water line

– Typically anchored in position and remain stable for drilling in the semi-submerged floating position due to wave transparency characteristics at the water line

– Three rigs use computer-controlled thruster (dynamic-positioning) system to maintain the rig’s position over a drill site

Types of Rigs

• Jack-up Units (14)– Mobile, self-elevating drilling platform equipped with legs

that are lowered to the ocean floor until a foundation is established to support the drilling platform

– Used in water depths of 20 to 350 feet

• Drill Ship (1)– Self-propelled – Positioned over a drill site through the use of either an

anchoring system or a dynamic-positioning system– Used in water depths of up to 7,500 feet

Worldwide Rig Locations

Total 45 rigsSource: Company Website

Source: Oil Market Report. March 2009

Key Deep Water Areas

Source: Howard Weil Energy Conference. March 2009

Industry Overview

• Profitability depends on technical expertise and efficiency of operation.

• Labor Intensive Industry– Avg. Annual Rev. per Employee = $410,000

• US oil and gas drilling support activities expected to grow at an annual compounded rate of 4% until 2013.

Source: Hoovers Competitive Summary. April 2009

DO & Top Competitors• Diamond Offshore (DO)

– Market Cap: $9.64 Billion– Close (4/20/2009): $69.64

• Transocean (RIG)– Market Cap: $20.49 Billion– Close (4/20/2009): $64.09

• Noble (NE)– Market Cap: $6.68 Billion– Close (4/20/2009): $25.56

• ENSCO (ESV)– Market Cap: $41.90 Billion– Close (4/20/2009): $29.55

Competitors from Hoovers

Comparables

Company Name Exchange:Ticker

Return on

Assets %

Return on

Equity %

Return

on

Capital %

Gross

Margin %

EBITDA

Margin

%

Ensco International Inc. (NYSE:ESV) NYSE:ESV 16.3 27.5 19.5 67.3 66.5 Noble Corp. (NYSE:NE) NYSE:NE 18.1 32.5 20.8 67.1 65.0 Diamond Offshore Drilling Inc. (NYSE:DO) NYSE:DO 25.8 42.1 33.1 64.7 62.1 Transocean Ltd. (NYSE:RIG) NYSE:RIG 10.2 28.9 11.7 57.7 50.7

High 25.8 42.10 33.10 67.30 66.50 Average 17.6 32.75 21.28 64.20 61.08 Median 17.2 30.70 20.15 65.90 63.55 Low 10.2 27.50 11.70 57.70 50.70

Company Name Exchange:Ticker

Total

Enterprise

Value ($mm)

TEV/LTM

Total

Revenues

TEV/LTM

EBITDA P/TangBV

Forward

P/E

Diamond Offshore Drilling Inc. (NYSE:DO) NYSE:DO 9,971.0 2.81 4.53 3.05 6.34 Ensco International Inc. (NYSE:ESV) NYSE:ESV 4,047.1 1.65 2.49 1.05 3.53 Noble Corp. (NYSE:NE) NYSE:NE 7,608.3 2.21 3.4 1.36 3.64 Transocean Ltd. (NYSE:RIG) NYSE:RIG 34,940.3 2.76 5.43 2.64 3.89

High 34,940.3 2.81 5.43 3.05 6.34 Average 14,141.7 2.36 3.96 2.03 4.35 Median 8,789.7 2.49 3.97 2.00 3.77 Low 4,047.1 1.65 2.49 1.05 3.53

Source: Capital IQ

DO & Competitor 5 yr Returns

Source: Google Finance

Floaters After Newbuild Deliveries

Source: Howard Weil Energy Conference. March 2009

Crude Oil vs. DO Stock Price

Source: Howard Weil Energy Conference. March 2009

DO Correlation with Crude Oil Spot

Extremely High Correlation!

R2 = 0.9347 Source: Bloomberg. April 2009

DO Correlation with Rig Count

Extremely High Correlation!

R2 = 0.8244 Source: Bloomberg. April 2009

Oil Cost Curve

Competitive Correlation

Competitor Dividends

Source: Howard Weil Energy Conference. March 2009

Return on Capital Employed (From Credit Suisse)

Source: Howard Weil Energy Conference. March 2009

Strengths & Weaknesses

• Strengths– Leading player in deepwater drilling– Recently finished upgrading three rigs in 2008

• Increases efficiency and marketability– Conservative capital structure increases survivability in tough

times

• Weaknesses– Cyclical industry with intense price competition– Heavily rely on a limited number of customers

• Top 5 customers accounted for 40% of revenues– Contracts do not adjust for increases in operating costs

Opportunities & Threats

• Opportunities– Capitalize on foreseeable growth in emerging markets– Profit from the decline in mature onshore oil fields

which require offshore exploration.• Threats

– Worldwide demand for oil– The ability of the Organization of Petroleum Exporting

Countries (OPEC) to control production levels and pricing.

– Public Health for employees

Office Locations• Headquarters in Houston, Texas• Regional offices in Louisiana, Australia, Brazil,

Indonesia, Scotland, Singapore and The Netherlands

Source: Company Website

Ownership

• 50.4% owned by Loews Corporation(NYSE:L), a diversified holding company– Three officers from Loews serve on Diamond

Offshore’s Board of Directors

• 94.83% owned by institutions

Key Management Executives• James S. Tisch, Chairman of the

Board and Director– Served as CEO until 2008 and a former

CEO at Loews (parent company)

• Lawrence R. Dickerson, CEO, President and Director– Served in the United States Commission

on Ocean Policy from 2001-2004

• Gary T. Krenek, CFO and Senior VP– Served as CFO since 2006

Valuation

• DCF : $63/share• Triangulation: $60/share

– 10% to Comp’s P/E ratio– 90% to DCF

Recommendation

• Write 1 Sept. 2009 80 strike Call Contract • Purchase 1 Sept. 2009 60 strike Put Contract • Execute Flat, or with slight credit to account• Why?

– Protection from market volatility during the summer.

– Capitalize on potentially sharp price moves during the summer.

– Protect downside with a net cash inflow.– Allows exit at a good price.