Goldman Adds Diamond Offshore To 'Conviction Sell' List, Removes Noble

Weakness in the offshore rig market is likely to persist through 2020, Goldman Sachs’ Waqar Syed said in a report. He added that Diamond Offshore Drilling Inc (NYSE: DO) was currently “overearning versus spot rates” and would likely record the highest EBITDA decline through 2020, while Noble Corporation (NYSE: NE) should witness the lowest decline.

Sell Swap

Analyst Syed downgraded the rating on Diamond Offshore from Neutral to Sell, while maintaining a price target of $10. The rating on Noble has been upgraded from Sell to Neutral, while the price target remains at $4.

Diamond Offshore’s shares have declined by 27 percent year-to-date, versus 48 percent for Noble. There is additional downside to the $10 price target for Diamond Offshore, Syed noted, mentioning the key reasons as:

1. The company is significantly over-earning versus the spot market. With key above-market contracts set to expire through 2020, the company’s EBITDA would decline the most in the peer group. Diamond Offshore’s EBITDA is expected to decline 40 percent annually, versus 10 percent for Noble, which has already gone through a sharp EBITDA correction.
2. Since 76 percent of Diamond Offshore’s estimated gross profit for 2018 is contributed by three key contracts, even if one is cancelled, EBITDA would decline earlier than forecasted.
3. Demand for jack-ups is expected to recover before that of floaters, and Diamond Offshore has the least jack-up exposure within the peer group. Noble has significantly higher exposure to jack-ups.

Do you have ideas for articles/interviews you'd like to see more of on Benzinga? Please email feedback@benzinga.com with your best article ideas. One person will be randomly selected to win a $20 Amazon gift card!