First, lets take a look at Diamond.
- Diamond Offshore Drilling Inc, the world's second-largest contract oil and gas driller, reported a 20 percent jump in quarterly profit, boosted by gains from its floating rigs.
- Net profit climbed to $348.6 million, or $2.51 per share, from $290.5 million, or $2.09 per share, a year earlier, the company reported on Thursday. Analysts' average earnings forecast was $2.21 per share, according to Reuters Estimates.
Cash-rich Diamond, in any protracted downturn, has the wherewithal to snap up first-rate equipment on the cheap. The fat balance sheet, combined with generous cash flows, also allows the company to pay out handsome special dividends, which, together with the regular ones, totaled $6.75 in the past 12 months. At the stock's current price of 66, that means Diamond stockholders (including Loews) are getting a yield of 10.2% on their investment. Not bad when 10-year Treasuries yield 2.8%. As Peter Vig puts it, "I like getting paid up front."
Similar results from Noble:
- Offshore oil and gas driller Noble Corp reported an unexpectedly strong rise in quarterly profit despite global pressure on drilling demand due to weaker energy prices, and its shares rose 4 percent.
- Noble's first-quarter net profit was $414 million, or $1.58 per share, versus $384 million, or $1.43 per share, a year before, the company said on Wednesday. Revenue rose 4 percent to $896.1 million.
- Analysts had expected earnings before items of $1.46 per share on revenue of $891.9 million, according to the averages on Reuters Estimates.
With its impressive balance sheet -- long-term debt (net of cash) amounts to less than 5% of equity -- Noble is ready, should things "get ugly," as Chief Executive David Williams puts it, to do what it has always done in a downturn: buy rigs at bargain prices, this time including, perhaps, ultra-deep new-builds.
My Take: The assumption was that with crude oil prices this low, there would be pressure on the huge day rates that these drillers can demand for deep water drilling. Obviously that hasn't held these companies back. A lot of people talk about Transocean in this sector, but I like these companies better. They are a bit smaller and can be more nimble in how they manage things. Transocean completed that big merger with Global Santa-Fe last year, so they are quite large. Also, Diamond and Noble has profit margins of 54%, which is massive. You also have to like the special dividends that Diamond pays out.
As soon as the economy begins to turn, oil prices are going to rise. These companies are going to be well positioned, and I'd be a buyer of either stock, especially if we see some weakness in the next quarter or two.
No positions in stocks mentioned.