Houston’s Diamond Offshore Drilling Inc., one of the top offshore rig contractors in the world, last week reported better-than-expected quarterly earnings from lower operating costs. Competitor Noble Corp. issued a mixed report, but CEO David Williams said the fundamentals for the offshore industry remain strong.

“Industry fundamentals remain solid across the offshore spectrum, as evidenced by the continued success with securing contracts for both floating and jackup rigs,” said Williams. “The standard jackup sector has experienced substantial improvement over 2012, with recent contract signings on 15 rigs in the Noble fleet representing an average day rate improvement of approximately 40% from the previous contract day rate.

“In the ultra-deepwater sector, a record year for announced discoveries, along with expanding geographic reach by our customers, greater offshore access and a building field development project backlog, are leading to expected higher customer demand, longer contract durations and the prospects for higher dayrates.”

At Diamond, operating costs fell 8% in 3Q2012 from a year earlier. However, net profits year/year (y/y) were down 31% to $178 million ($1.28/share) from $257 million ($1.85), while revenue plunged 17% to $729 million from $878 million. The earnings results were in line with Wall Street expectations, but analysts on average had expected revenue to be about $5 million higher.

The revenue decline resulted from lower rig utilization in the quarter. Utilization rates, which measure the number of rigs being used as a percentage of a company’s fleet, fell for deepwater rigs in the period, which was attributed in part to downtime from Hurricane Isaac, which impacted Gulf of Mexico (GOM) operations.

“Our results for the quarter benefited from lower-than-anticipated operating expense, primarily owing to our continued emphasis on controlling costs,” said Diamond CEO Larry Dickerson.

The CEO, like Williams, also pointed to better days ahead revenue-wise during a conference call with analysts. The company won 13 rig contracts between July and September, compared with 14 a year ago and in 2Q2012. The latest contracts are expected to add up to $1.7 billion in revenue and 12.1 rig-years of contract drilling backlog, Dickerson said.

Diamond, which is majority owned by Loews Corp., has reported declining revenue over the past year as the entire offshore drilling sector continues to recover from the 2010 Macondo well blowout in the deepwater GOM.

The company’s operating margins in the latest period fell to 33.6% from 39.6% in 3Q2011. Day rates for ultra deepwater floaters rose 5.4% y/y, but utilization fell to 75% from 88%. For deepwater floaters, dayrates were down 20% and utilization dropped to 95% from 99%. Midwater floaters declined 3.7% decline in dayrates, with utilization improving to 71% from 70% a year ago.

Noble, which is based in Switzerland, attributed its lower-than-expected earnings in 3Q2012 in part to lower utilization rates for two drillships, as well as extended downtime in the GOM from Hurricane Isaac. Some out-of-service time from mechanical problems that involved several rigs also impacted results.

Profits for the latest quartered tallied $115 million (45 cents/share), versus $135 million (53 cents) in 3Q2011. However, operating income climbed 8.8% to $178.9 million from $163.6 million. And contract drilling services revenues jumped almost 20% y/y to $833 million, compared with $705 million. In addition, Noble’s rig utilization rose slightly to 78% from 76% y/y.

Noble’s total backlog at the end of 3Q2012 stood at $14.8 billion.

The contractors’ reports appeared to match a review by IHS Inc. last week, which found that following a turbulent three-year period in which offshore drilling companies were hit by the impacts of the financial crisis and the GOM drilling moratorium, the sector is showing signs of “recovery and reinvestment,” in large part because of rising day rates and demand for deepwater drilling services.

“This sector faced a perfect storm, and investors did not take kindly to this sequence of events, as witnessed by the stock market collapse of offshore driller equities,” said IHS’s John Parry, who authored the report. “The recovery has been agonizingly slow, particularly for Transocean, whose rig [Deepwater Horizon] was involved in the Macondo incident, and for Diamond Offshore Drilling, which has the oldest fleet among the major offshore drillers and the fewest new rigs under construction but, it is a recovery, and we started to see a reversal of fortune for this sector in the first half of 2012.

“Significant earnings gains appear likely for the sector in 2013 and 2014, as energy company clients appear willing to pay higher day rates, particularly for newer, more sophisticated offshore rigs.”

Post-Macondo concerns, which pressured the offshore drilling sector particularly in the U.S. GOM last year, have eased, Parry noted. In addition, offshore drillers are continuing a “major reinvestment cycle to replace their aging jack-up fleets, while also adding more sophisticated floating rigs for deepwater and harsher environments.”

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