Diamond Offshore Drilling's (NYSE: DO) shares are poised to break-out to the upside, hence I'm reiterating my Buy rating on DO, first recommended on June 10, 2009, at a price of $91.63.
Diamond Offshore is considered to be better-positioned than other offshore oil/natural gas drillers for 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. DO services customers in about 50 countries; a major customer is Petroleo Brasileiro (NYSE: PBR).
Further, the reappearance of the bull market in oil is obviously very good news for Diamond, and Wall Street has adjusted its share price according: shares have nearly doubled in five months to about $90. Still, with a P/E of just 9 and strong growth, DO is still not pricey: a share split is not likely. The First Call FY2009/FY2010 EPS estimates for DO are $10.03 to $9.75.
The risks? Obviously a sustained drop in oil's price to below $40 would decrease drilling activity and send DO share's back to the $50-range. Given probable increasing global demand for oil in the year ahead and beyond, a fall in oil's price to $40 is highly unlikely.
Technically, Diamond's stock has encountered resistance near $98, and there will be, of course, psychological resistance at $100. But once those are cleared, they'll serve as support for the stock.
Stock Analysis: Diamond Offshore Drilling is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% 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 75% of your DO position before December 2009. Sell/stop loss if you were to buy shares in this company: $42.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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