Diamond (DO) in the Rough

Third Quarter Profits Up:
Diamond Offshore Drilling Inc. (DO) said Last October its third-quarter earnings doubled. The company noted the demand for its equipment and services had risen substantially driving revenue upward.

Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/ 2006_12_26_Diamond.mp3 .

Diamond’s net income rose to over $160 million from just over $80 million in the previous year’s 3rd quarter. However, these results were short of analyst’s estimates of around $170 million.

The company’s revenue increased 66 percent to nearly $515 million from $310 million last year; analysts had predicted a number in the $520 million range.

Diamond said revenue and operating-income increased as oil companies continued to produce at record high levels to exploit high oil prices.

One of Fortune’s 10 Stocks to Buy Now:
In an article appearing online on 14 December, Fortune noted Diamond Offshore as one of its top 10 picks ( money.cnn.com ). The article states vendors like Diamond Offshore, who hire their oilrigs to large oil companies like Chevron and Exxon for a daily fee, are able to increase their daily fee because of the recent increases in oil prices. The article goes on to say analysts expect a jump of around 85% in Diamond’s earnings in the coming year.

Deep-sea drilling rigs are currently in short supply and the daily rates for oilrigs not currently under contract are extremely high. Diamond has more oilrigs available than its rivals, and is in a good position to reap strong profits in the coming year.

Company Profile:
Diamond Offshore Drilling is a worldwide offshore oil and gas-drilling contractor. Its markets for service include deep water, harsh environment, conventional semi submersible, and jack-up markets. At the end of 2005, the company operated 44 offshore drilling rigs. Diamond Offshore primarily offers its services to oil and gas companies and government-owned oil companies in the United States, Mexico, Europe, Africa, South America, Australia, Asia, and Middle East. The company was incorporated in 1989 and is headquartered in Houston, Texas. Diamond Offshore Drilling, Inc. is a subsidiary of Loews Corporation.

Competitors:
Competitors for DO include: Globalsantafe Corp. (GSF), Transocean Inc. (RIG), Atwood Oceanics Inc. (ATW), ENSCO Intl. Inc. (ESV), Noble Drilling Corp. (NE), and Rowan Companies Inc. (RDC).

Potential Trades:
In light of the current bullishness of oil and the positioning of DO, we are bullish on Diamond Offshore Drilling. Using PowerOptions powerful stock options search tools we discovered the following potentially lucrative stock options positions:

Covered Call — Diamond Offshore Drilling Inc (DO) $80.18
OPTION Strike
Info
Opt
Bid
%Dnsd.
Prot.
%If
Inch.
%If
Asgnd
DOAP 07 JAN 80.00 $3.00 3.70% 3.80% 3.80%
Diamond Offshore Drilling Inc. (DO) $ 80.18 Bull-Call Debit Spread
Sell
Opt
Strike
Info
Bid
Price
Buy
Option
Strike
Info
Ask
Price
%
Return
Break
Even
DOAO 07 JAN 75.00 $6.30 DOAN 07 JAN $70.00 $10.70 13.60% $74.40

The covered calls stock options position for DO offers a nice downside protection of 3.7% and a reasonable potential profit of 3.8% in only 26 days. This trade is an in-the-money call option because the stock price is above the strike price of the option.

The second trade is a more risky bull call debit spreads position. This trade has a potential return of 13.6% if the stock is above $75.00 at stock options expiration. The break-even price is $74.40 and $440/contract would be lost if the stock price is below $70.00 at stock options expiration.

For more information about how to identify and research great option trades, visit the PowerOptions website. PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades and you will find the data you need to make quick, clear, and informed decisions. With PowerOptions tools, you can trade knowing you have found the best investment for your risk/reward profile. PowerOptions provides a toll-free number (1-877-992-7971) for customer support (PowerOptions’s customer support is second to none in the industry) for answering customer questions.

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