Real Client Managed Portfolio

Diamond Offshore (DO)October 25, 2012

Presented By:Eric Hoffman

Patrick O’DonnellXiaohua (Leah) Xu

Agenda• Diamond Offshore in the Portfolio

• Macro-Economic Review

• Stock Market Prospects

• Diamond Offshore (the Business)

• Financial Analysis

• Financial Projections

• Application of Financial Tools

• Recommendation

Diamond Offshore In the PortfolioFebruary 2008

• Purchased 100 shares @ $122.90 for a total cost of $12,290• Give portfolio exposure to oil and drilling sector

November 2008• Purchased 50 shares @ $72.96 for a total cost of $3,648

September 2009• Written call option exercised, sold 100 shares at adjusted price of

$76.25 totaling $7,625 • Strike price adjusted to $76.25 from original strike price of $80.00 due

to a special cash dividend of $1.875 paid twice over the holding period of the option

• Realized loss of $4,665November 2010

• Purchased 100 shares @ $68.10As of October 24, 2012

• Diamond offshore price: 69.52• Currently have 150 shares with unrealized loss of -.2%• Currently represents 3 % of the total portfolio (7.6 of portfolio equity

holdings)

The Company• The company originally started as Diamond M Drilling

company. In 1980, Loews Corp bought the distressed

company’s assets. The company was renamed to

Diamond offshore and held private until 1995.

• Currently one of the largest off-shore drilling corporations

• Headquartered in Huston, TX – Global presence (primarily

in South America, Middle East, Africa, Asia and Pacific

Asia)

• 98% owned by 447 institutional and Mutual fund

shareholders

• 50.4% Owned by Loews Corporation (Jim Tisch).

• The primary driver of the drilling

market is energy consumption.

– Easier for DO to earn contracts

– Determines capacity/daily use rates of rigs

– Greater demand for product naturally

shifts power from buyer to supplier.

Macro Economic Review

Source: U.S. Energy Information Administration, International Energy Outlook 2011

:

Source: U.S. Energy Information Administration, International Energy Outlook 2011

Company Overview

• Leading global offshore oil and gas drilling contractor

• Customer Base

• major independent oil and gas companies• government-owned oil companies

• Capacity: 44 offshore rigs as June 30, 2012• 32 semisubmersibles • 7 jack-ups• 5 dynamically positioned drillships

• 4 of them are under construction: delivery expected in second and fourth quarters of 2013 and the remaining two in the second quarter of 2014Source: Form 10Q,Diamond offshore, FY 2012

The fleet

Source: Form 10k,Diamond offshore, FY 2011

Stock performance

BP oil spill in the Gulf of Mexico

Source: Yahoo Finance, dates from 1/1/08 – 10/24/12

Competitors

• Transocean (RIG): 9 Billion sales

• Noble Corporation (NE): 3 Billion sales

• Ensco PLC (ESV): 4 Billion sales

Source: Yahoo Finance, dates from 1/1/08 – 10/24/12

Business Strategy

• Cost Leadership– Reduced Equipment downtime– Safety

• Upgrade fleet to meet customer demand for advanced efficient and high-tech rigs

– Acquire or build new rigs at attractive price– Enhance the capabilities of existing rigs at a lower cost and reduced construction

period

• Take advantage of industry cyclicality to make opportune investments at times of distress or when others are unwilling or unable to invest

– 2009: acquired two new-build ultra-deepwater, dynamically positioned semisubmersible drilling rigs

– 2010: entered into three separate turnkey contract with Hyundai for three ultra-deepwater drillships

– 2012: announced the construction of a moored semisubmersible drilling rigs that will be designed to operated in water depth up to 6,000 feet

Source: Form 10-K,Diamond offshore, FY 2011

Business Model

Revenue Drivers• Day Rates

– Ultra-deepwater and deepwater: strong • successful exploration and development

programs offshore Brazil and West Africa– mid-water floater: stable – Jack-up: Decline

• Utilization Rate:– the actual percentage of time in a year a rig

would be utilized

Revenue DriversDay Rates

Source: DO 10K and 10 Q 2005- 2011

Utilization Rate

Financial Analysis

• So…How does this company make money?

• Jack ups (10 – 350 Ft)

• Intermediate Submersibles (4000 ft)

• Deep-water Drillships/Submersibles (greater

than 4000 ft)

The Fleet

The Contracts

• See Excel “Estimate”

The Estimates

• Customers: DO’s five largest customers in the

aggregate accounted for 62% of our consolidated

revenues primarily lead by Petrobras and OGX (who

accounted for approximately 35% and 14% of DO’s

consolidated revenues in 2011).

• Location:

– 40% North America

– 20% South America

– 20% Africa/ Europe/Mediterranean

– 20% Asia/Pacific Asia

So where is the revenue coming from?

• Depreciation

• Bad Debt Expense

• Impairment

• Sell for Loss Transactions

• Foreign Exchange

So where is the revenue leaving?

Multiples Valuation

Multiples Valuation

DuPont Breakdown

Historical Returns

WACC Analysis

DCF Analysis

Recommendation: Hold

• Current Stock Price:$69.52

• DCF Valuation:$67.79

• Comparable Companies Valuation:$67.06

• Recommendation: Hold 150 shares