Diamond Offshore: For Now, Stand Aside

Posted Mar 4th 2010 2:40PM by Joseph Lazzaro
Filed under: Oil

Investing in stocks has its challenging moments, and oil/natural gas servicer Diamond Offshore Drilling (DO), first discussed here on June 10, 2009 at a price of $91.63, is one. Further, for now it's best to stand aside regarding DO. Here's why:

Diamond Offshore is considered to be better-positioned than other offshore oil/natural gas drillers, 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 (PBR).

Even so, a better earnings multiple than the current 9.6 had been expected with DO, but so far it has not materialized, and that's weighed on the shares. The First Call FY2010/FY2011 EPS estimates for DO are $8.71 to $9.12.

More recently, in early 2010 the stock formed a short-term double-top and also fell below the key 50-day moving average -- two bearish signals -- hence the stand aside caution. I'll re-review Diamond Offshore in about a month or so, or as conditions warrant.

I'd also raise the sell/stop loss to $77 from $42.

Stock Analysis: I consider Diamond Offshore to be a moderate-risk stock. If you've already purchased the company's shares, hold them. If you haven't, I wouldn't buy shares at this time. Revised sell/stop loss if you bought shares in this company: $77.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: Diamond Offshore Drilling, DO, pbr