Diamond Offshore Drilling Inc.

Han YangXuhao YangRyo Seob KimJionghan DaiTyler HaidaOctober 27, 2011

Analysts:

AgendaIndustry Analysis

Competitors

Company Overview

Company Performance

Valuation

Recommendation

Holdings History February 2008

Purchased 100 shares @ $122.82

November 2008 Purchased 50 shares @ @72.96

April 2009 Sold a Sep. $80 call @$5.85 Bought a Sep. $60 put @$4.78

September 2009 Sold 100 shares @ $76.25 vs. exercise adjusted strike on short call

October 2010 Purchased 100 shares @ $68.02

March 2011 Recommendation to sell 50 shares @ $80 limit NOT APPROVED

Holdings ContinuedOn Wednesday October 26, 2011

DO closed @ $65.15Currently hold 150 sharesCurrently DO holdings are 2.86% of total portfolio

holdings.

Industry

• Demand is driven by oil and gas prices

• Offshore drilling requires specialized equipment such as drill ships, semi-submersible rigs, “jack-up” rigs

• Deepwater drilling is expect increase in the next few years

• Large oil and gas field services companies typically do their business internationally

CompetitorTransocean (RIG)

- Largest offshore drilling firm ($18 B market cap)

Noble Corporation (NE)

- Swiss offshore firm ($9 B market cap)

Ensco PLC (ESV)

- Founded in 1975 in British ($11.9 B market cap)

Fleet Comparison

CompanyHigh-Specification Floaters

Intermediate Semisubmersibles

Jack-ups Total

DO 14 19 13 46

RIG 47 25 63 135

NE 7 19 45 71

EVS 7 20 48 75

Competitor

Source: DO, RIG, NE, EVS 2010 annual report

Revenue distribution comparison

　 Do RIG ESV NE

Total Revenue 3322 100% 9576 100% 1696 100% 2,807 100%

  South America 1308 39%　 0%　 0% 527 19%  Australia/Asia/Middle East 641 19%　 0% 502 30% 636 23%

  United States 635 19% 2117 22% 378 22% 585 21%

  Europe/Africa 601 18% 1183 12% 341 20% 503 18%

  Mexico 136 4%　 0%　 0% 553 20%

Other contries 　 　 6276 66% 475 28%　 　

Competitor

Source: bloomberg

Performance comparison

P/E 1-yr return

Earning margin (12

months) ROEDebt/Equity

DO 8.83 -7.11% 29.70% 25.40% 35.00%

RIG 498.4 -14.40% 0.40% -0.40% 53.00%

NE 26.35 3.86% 13.20% 4.50% 47.80%

ESV 17.48 7.94% 24.40% 5.30% 47.80%

Competitor

Source: yahoo finance

Company Overview

Diamond Offshore Drilling, Inc.is a leading deepwater drilling contractor, owns and operates one of the largest fleets of offshore drilling units in the world. The company's diverse fleet consists of 32 semisubmersibles, 13 jack-ups and four dynamically positioned drillships, three of which are on order with delivery expected in 2013 and 2014We provide offshore drilling services to a customer base that includes major independent oil and gas companies and government-owned oil companies.

source : http://www.diamondoffshore.com/

Global Presence

Global Presence

Source: DO 2010 Annual Report

The Fleet Jack-up Semisubmersible

Drillship Drilling ship

Source: http://www.boemre.gov/tarprojectcategories/structur.htm

Jack-up Jack-ups rigs are mobile, self-elevating drilling platforms equipped with legs that are lowered to the ocean floor until a foundation is established to support the drilling platform. Used for drilling in water depths from 20 feet to 350 feet. Currently have 13 jack-up drilling rigs

Source: http://www.offshore-technology.com/projects/goldeneye/goldeneye4.html

Semisubmersible Semisubmersible operate in a “ semi-submerged” position, remaining afloat, off bottom, typically anchored in position and remain stable for drilling in the semi-submerged floating position High-specification semisubmersibles are generally capable of working in water depths of 4,000 feet or greater or in harsh environments Intermediate semisubmersibles generally work in maximum water depths up to 4,000 feet Currently have 32 semisubmersibles

Source: http://www.glossary.oilfield.slb.com/DisplayImage.cfm?ID=639

Drillship

Typically self-propelled, positioned over a drill site through the use of either an anchoring system or a dynamic-positioning system similar to those used on certain semisubmersible rigs. Capable of working in water depths as deep as 12,000 feet Currently have one high-specification drillship, the Ocean Clipper. Three drillships under construction, BlackHawk and BlackHornet will be delivered in 2013 while BlackRhino in 2014.The former two have already signed contracts with Anadarko with day rates of 495K/day and total backlog of 1.8 billionSource: http://www.diamondoffshore.com/

Business model and Revenue drivers

Day rate Contracts

Our contracts to provide offshore drilling services vary in terms and provisions. We typically obtain our contracts through competitive bidding Guaranteed a fixed day rate basis regardless of whether or not such drilling results in a productive well

Revenue Drivers

Day rate: the rate that DO charges an operator for each day over contract period for the utilization of rigs Utilization rate: the actual percentage of time in a year a rig is utilized

Source: DO 2010 Annual Report

Trends of Revenue Drivers

Source: DO 10Q from 2004 to 2011

Aging Problem of Fleet

DO’s fleet is actually the oldest in offshore drilling industry with an average age of 32 years. Source: http://www.rigzone.com/news/article.asp?a_id=48839

Negative result of fleet aging The upgrade of fleet would cost several billions, it would prevent the fleet from becoming outdated and help create long-term value. Rather than hoard cash for potential rig-buying opportunities at the bottom of the cycle, Diamond has been paying out its excess capital to shareholders in the form of special dividends, which is 0.75 dollars per quarter The substantial increase in activity is placing tremendous stress on the industry's aging rig fleet. Diamond has been slower than its peers in upgrading its fleet and ordering new rigs to handle rich ultra-deep-water contracts. Diamond will have higher maintenance expenditures than peers' in the next few years.

Once current contracts expire, Diamond's old rigs will be competing with peers' upgraded and ultra deep-water rigs for lucrative contracts. We think customers will pay more to retain peers' rigs for challenging jobs, which will leave Diamond with lower fleet-utilization and day rates. Ultimately, Diamond's profitability would be severely damaged.

ROE Analysis

(%) 06 07 08 09 10

EBIT Margin 45.8 47.3 54.0 52.2 41.9

Asset Turnover 61.5 66.3 89.0 70.5 59.7

Leverage Ratio 178.2 150.9 147.4 172.5 174.2

Interest Ratio 101.5 101.0 100.1 97.6 93.7

Tax Burden 73.2 67.9 71.0 73.7 71.5

ROE 37.3 32.4 42.0 39.4 25.4

Multiple – P/E

Source: Capital IQ

Multiple – P/E Correlation between

price and earnings

Investors responded to BP oil spill

Price was driven by the market in the pass year

Source: Capital IQ

Source: Yahoo Finance

P/E in last 3 years

Highest 11.85

Lowest 5.76

Average 8.9

10/24/2011

8.83

Multiple – P/E

Source: Capital IQ

DO RIG ESV NE

5-year Avg

12.31 11.97 9.46 11.17 11.23

DO is among the top before the oil spill incident

Recent soar in P/E is not “healthy”

Stock price went down

Earning decreased even more

Use 5-year average

Multiple – P/EIn the coming years

Market shows optimism on Euro debt issue

Industry average P/E is 11.23 for the past 5 year

DO reported increase in third quarter earning

DO was among the top before the oil spill incident

P/E may rise, but we do not expect P/E to jump over historical high

Use P/E = 10 for projection

Estimated Price is $90.60

P/E in last 3 years

Highest 11.85

Lowest 5.76

Average 8.9

10/24/2011

8.83

Multiple – P/S

Source: Capital IQ

Price v.s. Earning

Price v.s. Sales

Multiple – P/SNet margin now is lower than it was from 2006

to 2009

P/S was 2.63 on Oct. 24, 2011

We do not expect a great raise in P/S

Use P/S = 2.8 for projection

Estimated Price is 67.12

Multiple – P/BV

Source: Capital IQ

Recommendation

Estimated Price

DCF $74.54

P/E $90.60

P/S $67.12

Recommendation: Hold for now