Most investors know that it's an energy-intensive world, and even though the U.S. and global recessions have led to real declines in aggregate energy usage, don't look for that trend to continue. Further, the Obama administration's admirable goal to create a more self-reliant, energy-independent nation and the impact of efforts to first limit, then eliminate global warming from fossil fuels opens the door to alternative energy source development.But, as Saudi Arabia reminds us, and the world, barring a breakthrough technology, fossil fuels will remain a major energy source for at least the next thirty to fifty years. In other words, the reign of oil has merely paused, not ended, which is why it's prudent to review Diamond Offshore (NYSE: DO).
In general, analysts see 7-10% revenue growth in FY2009 for DO, with another 8-12% gain in FY2010.
Further, Diamond Offshore is considered to be better-positioned than other offshore oil/natural gas drillers for fiscal years 2009-2010, due to a strong backlog of existing contracts, and a significant cash position. Some of that cash could be used to buy newbuild rigs and/or weaker offshore drilling contractors. The First Call FY2009/FY2010 EPS estimates for DO are $10.17 to $9.55.
Also, the resumption of the bull market in oil is obviously very good news for DO, and Wall Street has adjusted its share price accordingly: shares have nearly doubled in five months, to about $90. Still, with a P/E of just 9, and strong growth, DO is not pricey; a share split is not likely.
The risks? Obviously a sustained drop in oil's price to below $40 would decrease drilling activity and sent DO share's back to the $50-range: given current economic indicators, the likelihood of an oil price collapse is about 10-15%, which easily tips the scale in favor of a Buy for DO.
Stock Analysis: Diamond Offshore is a moderate-risk stock. Consider buying a 25% position in DO now; then buy another 25% in three months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your DO position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $42.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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