Why Diamond Offshore Drilling Dropped

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Diamond Offshore Drilling slipped 2% this morning after Wells Fargo downgraded the oil and gas driller from outperform to market perform.

So what: Along with the downgrade, analyst Matthew Conlan lowered his valuation range to $54-$56 (from $70-$72), representing about 6% worth of upside to yesterday's close. While contrarians might be attracted to the stock's steady slide over the past year, Conlan thinks the appreciation prospects remain limited given his view of lower utilization and rates going forward.


Now what: According to Wells Fargo, Diamond Offshore's risk/reward trade-off is pretty balanced at this point. "We have factored in lower utilization and rates for DO's older floaters, including the modeled stacking of a few rigs (Saratoga, Lexington), and vaguely dispersed downtime for other mid-water rigs," noted Conlan. "We are decreasing our valuation range to $54-$56 from $70-$72, representing EBITDA multiples of roughly 6.6-6.8x 2014E EBITDA and roughly 5.5x 2015E EBITDA, including an estimated $1.5B of net debt increase DO will have to incur during 2014 to complete its construction program." Of course, with Diamond Offshore shares now off about 35% from their 52-week highs and trading at a single-digit forward P/E, long-term value Fools might want to take advantage of Wells' short-term concerns.

More compelling energy opportunities

Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

The article Why Diamond Offshore Drilling Dropped originally appeared on Fool.com.

Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Learn about investing from the comfort of your own home.

Portfolio Basics

Take the first steps to building your portfolio.

View Course »

Investment Strategies

Learn the strategies you need to build a winning portfolio

View Course »

Add a Comment

*0 / 3000 Character Maximum