Executive Summary
Outlook
Global deepwater markets are tight, with visibility strong and backlog for deepwater players
continuing to build. New capacity is on the way, but with access to onshore reserves limited
and exciting new opportunities (most notably in Brazil), there is nearly universal agreement
that deepwater demand should continue to outstrip supply for years to come.
Demand in shallow-water markets remains strong as well, but it is less visible. Meanwhile,
supply growth is both substantial and imminent (see Figure 1). Although we believe that
sufficient demand will ultimately materialize to absorb the new capacity, this demand growth
tends to be fairly linear. The supply surge, on the other hand, is quite non-linear and the
market will likely have to balance this with meaningfully lower dayrates near term.

We have seen quite a bit of thematic investing in the offshore drilling space. Deepwater
exposure is (justifiably) desirable, with purer shallow plays getting a mixed reception. The
problem is that nearly all companies have both types of assets, and it appears to us that
similar assets are being valued quite differently in different companies. While management,
asset mix and geographic exposure (among other things) can explain some disparity, the
offshore drilling business is essentially a commodity industry in the long run, and significant
divergence in the implied values of assets and/ or the cash flow they generate cannot persist.
With this issue in mind, we set about finding a dispassionate approach to valuation with a
level of detail we had not seen before. We have long modeled earnings for offshore drillers
on a rig-by-rig basis. We are now taking the additional steps of valuing each contract on each
rig as well as examining the value of un-contracted time on each rig under a range of
utilization and pricing assumptions.

Table of Contents
Executive Summary........................................................................... 3
Deepwater Market Update ............................................................... 6
Jackup Market Update.................................................................... 10
Valuation .......................................................................................... 14
Company Implications .................................................................... 19
Diamond Offshore (DO)................................................................... 20
ENSCO International (ESV)............................................................. 25
Hercules Offshore (HERO)............................................................... 29
Noble Corp (NE)............................................................................... 33
Pride International (PDE) ................................................................ 37
Rowan Companies (RDC)................................................................ 41
Transocean Inc. (RIG) ...................................................................... 45
Risks.................................................................................................. 50
Appendix A - Regional Drilling Markets ........................................ 52
Appendix B – Rig Types .................................................................. 57

Valuation
Traditionally we have looked to replacement value multiples and TEV / EBITDA multiples to
value the offshore drillers. While the former approach tends to identify turning points
relatively well, it does a poor job on timing. The latter does not do a great job of valuing the
cash flow and visibility enjoyed by the industry in the current extended upcycle.
In this report we will detail a new approach to valuation. While are not breaking new ground
in terms of inventing new metrics, we believe we are providing investors with a new set of
tools to disaggregate the various components of value inherent or assumed in the offshore
drillers. In particular, we are essentially valuing each contract on each rig for each drilling
contractor using a discounted cash flow (DCF) analysis. We also apply a DCF to the uncontracted
time on each rig under various dayrate and utilization scenarios. Finally, we
determine a terminal/ residual value for each fleet (again on a rig-by-rig basis) using secondary
market transactions and market estimates from rig brokers. Tying it all together with
consistent methodology, we allow investors to see precisely what they are paying for
visibility (near-certain cash flow associated with contracts) and assets relative to how much
market risk they are assuming (un-contracted rig time). The results, in summary form, appear
in Figures 2 and 3 below with the “base” case analysis now serving as our target price for
each stock.