Goldman Sachs Reiterating Buy Diamond Offshore (DO)

Goldman Sachs has a Buy rating and a Diamond Offshore Drilling, Inc. DO and a $85 price target on shares. In a note to clients, Goldman writes, "We reiterate our CL-Buy on DO and expect a steadily improving midwater market and a tightening deepwater market to drive outperformance. We see 17% upside to our $85, six-month, NAV-based price target plus a 4.8% annual dividend yield. DO is highly leveraged to the midwater market, which is in turn highly leveraged to oil prices, and we believe this is underestimated. We are encouraged by DO's three new midwater contracts, all with rates 5%-10% above our estimate, as well as Ensco's recent contract at more than $320,000/day in Brazil. Management commentary was broadly bullish and appears to be backed by rising customer inquiries. Demand appears to be on the cusp of increasing in South East Asia and West Africa while the North Sea is likely to improve from an already healthy level of activity. Key pushback: Not enough demand to absorb supply (48 roll off in 2011). We disagree. Our top-down analysis of midwater demand relative to oil prices (lagged one year) suggests that 2011 should mark the turning point in demand and we expect all midwater rigs rolling off will be re-contracted. For the 18 uncontracted newbuilds coming into the market, our bottom-up analysis of the Top 280 projects gives us confidence that all of these rigs will be absorbed. We also highlight that there is historical precedent with 170-274 rigs contracted annually in the early stages of the last up-cycle." Shares of DO are down $1.03 in early Friday trading to $71.87, a loss of 1.4%.