This week’s Stock of the Week is in a sector that many have written off, which creates an opportunity for investors.

Finding Energy

Diamond Offshore Drilling Inc. (DO) has an important role in the much maligned energy sector, which some investors are treating as if the world is about to stop using oil and all its by-products. That is a vast overreaction and an investment opportunity.

Diamond provides contract drilling services to energy companies worldwide, helping search for and extract oil and natural gas from mid-water, deep-water and ultra-deep-water fields. It operates 19 offshore drilling rigs of multiple types, including 14 semi-submersible, four drillships and one jack-up rig—a self-elevating mobile platform. This diversity allows Diamond to serve a wide variety of client needs.

The stock is selling for only 10 times earnings and 60% of book value. Revenue may continue drifting downward for a time—from $1.6 billion in 2016 to a likely report of $1.46 billion for 2017 and $1.4 billion this year—but earnings  likely will rebound this year. (A dramatic fall in oil prices would hurt the stock, of course.) Diamond has positive cash flow and is paying down debt. And risk is further moderated by the fact that more than 50% of the company is owned by Loews Corporation, whose CEO, James Tisch, is a knowledgeable value investor and skilled capital allocator.

Fiscal year: December. Earnings per share: 2018 est./$1.50…2017 est./$0.90…2016/$1.76.

Matt Watson is portfolio manager of James Advantage Funds, Xenia, Ohio, including the $3.1 billion James Balanced: Golden Rainbow Fund (GLRBX) and the $16 million James Mid Cap Fund (JAMDX).

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