Diamond Offshore positioned to be ‘key beneficiary’ in deepwater offshore drilling upcycle

Offshore drilling contractor Diamond Offshore Drilling has recorded strong operational performance during the fourth quarter of 2022 and earned a sixth performance bonus in Senegal while making progress on the reactivation of a semi-submersible rig, which is considered to be the largest of its kind in the world.

Many factors were at play during 2022, however, the year was primarily marked by a global energy crisis and the return of the energy trilemma, which put energy security at the forefront. As a result, energy companies recorded bumper profits during 2022, as high demand, elevated oil and gas prices, and tight supply pushed countries to take steps to strengthen their energy security by seeking new hydrocarbon resources.

This left an impact on the offshore drilling market with the demand for rigs ramping up while day rates got a boost, as illustrated by 4Q and full-year 2022 results announced by Diamond Offshore’s rivals, which confirm that the contracts secured in 2022 came with higher day rates.

In line with this, Noble’s marketed fleet utilisation was 88 per cent in the three months that ended on 31 December 2022 and the firm benefitted from its merger with Maersk Drilling, as its backlog on 31 December 2022 stood at $3.9 billion.

On the other hand, Transocean’s total fleet average revenue efficiency was 98 per cent in 4Q 2022 and 96.4 per cent for the full-year 2022 while Valaris delivered revenue efficiency of 98 per cent in the fourth quarter of 2022 and 97 per cent for the full-year 2022. The firm secured a contract backlog of more than $400 million during 4Q 2022.

Within its results for the fourth quarter of 2022, Diamond Offshore reported a contract drilling revenue, excluding reimbursable revenue, for 4Q 2022, which totalled $208 million, compared to $190 million in the third quarter of 2022. The firm explained that the increase in revenue was due to a full quarter of operation in Senegal for the Ocean BlackHawk and the Ocean BlackLion drillships, operating for a full quarter at the higher day rate, and the Vela drillship going on contract in the fourth quarter.

The company explained that the increased revenue was partially offset by reduced revenues from the Ocean Onyx semi-submersible rig, which was cold stacked during the quarter, and the Ocean Endeavor semi-sub rig, which was in the shipyard for repairs, regulatory surveys, and steel renewals.

Bernie Wolford, Jr., Diamond Offshore’s President and Chief Executive Officer, remarked: “Diamond delivered another strong operational quarter with 96.4 per cent revenue efficiency and industry-leading safety performance. This completes a strong year in which our overall revenue efficiency was just under 94 per cent and our safety performance beat industry averages by a large margin.

“I would like to thank the entire Diamond team for continuing to deliver for our customers, enabling us to strengthen our relationships and favourably positioning the company for future contract awards.”

According to the offshore drilling contractor, its contract drilling expense, as a percentage of revenue, remained relatively flat compared to the prior quarter despite expenses associated with the reactivation of the Ocean GreatWhite semi-sub rig, the Vela drillship kicking off its maiden contract under Diamond management, and the Ocean Endeavor rig being in the shipyard for two months of the quarter.

The company’s adjusted EBITDA for the fourth quarter of 2022 was $12.5 million, compared to $18.4 million in the prior quarter, primarily as a result of the reactivation expenses associated with the Ocean GreatWhite rig. The firm’s net loss for 4Q 2022 was $52.4 million, compared to a net income of $5.5 million in the third quarter of 2022. The decrease in net income was largely a result of a swing in discrete, non-cash tax adjustments of approximately $49 million quarter to quarter.

Furthermore, Diamond Offshore’s tax expense during 4Q 2022 was $26 million, primarily a result of the mix of the company’s quarterly earnings and the lack of tax benefit on losses in certain jurisdictions as well as the increase in certain tax reserves for potential tax exposures. The tax benefit during 3Q 2022 was $23 million, primarily due to the recognition of certain deferred tax assets, the release of a valuation allowance, and the reversal of tax reserves after the expiration of the applicable statute of limitations in certain jurisdictions.

The company further outlined that the free cash flow during the fourth quarter of 2022 was $15 million, compared to a negative free cash flow of $30 million during the third quarter of 2022, primarily due to changes in working capital.

“We finished the year with approximately $1.8 billion, or 17.6 rig years of backlog, including $482 million added during the fourth quarter, and importantly we will have repricing opportunities for two high-specification drillships and two semi-submersibles in the next 12 months,” added Wolford.

Meanwhile, Diamond Offshore highlighted that the Ocean BlackHawk and Ocean BlackRhino rigs combined efforts during 4Q 2022 to earn “a well-based performance bonus” for the second consecutive quarter. This marks the sixth performance bonus earned by a combination of these rigs working on Woodside Energy’s campaign in Senegal.

Moreover, the offshore drilling contractor pointed out that its owned and managed fleet continued to perform well during 4Q 2022, achieving a revenue efficiency of 96.4 per cent while “good progress” was made on the reactivation of the Ocean GreatWhite rig. This rig is currently undergoing acceptance testing and is expected to start its contract with BP in March.

“Diamond’s performance continues to demonstrate our ability to deliver operational excellence to our customers in an efficient and industry-leading safe manner and positions us well to be a key beneficiary of this burgeoning upcycle in deepwater offshore drilling,” concluded Wolford.