By Victoria Stilwell 
 

Moody's Investors Service upgraded Diamond Offshore Drilling Inc.'s (DO) ratings by one notch on the contract driller's lower debt levels relative to its industry peers even as it funds fleet expansion.

The credit-ratings company now has Diamond Offshore as A3, satisfactory credit quality four notches above junk territory. The outlook is stable.

Moody's said the ratings reflects the company's strong market position with a large offshore-drilling fleet. The ratings firm said Diamond will have a competitive ultradeepwater- and deepwater-drilling-rig fleet upon completion of its new drill ships.

Although Diamond's fleet will be somewhat smaller than those of its peers ENSCO PLC (ESV) and Noble Corp. (NE), Moody's said it expects Diamond's peak debt levels to be significantly lower than the current debt levels of those companies.

Moody's said Diamond's ratings are unlikely to be upgraded further in the medium term because of expected deterioration in its leverage metrics as the company funds new drill ships that are under construction.

A downgrade could be possible if the company makes debt-funded acquisitions or if additional new rig construction increases leverage more than anticipated.

Diamond in April reported its first-quarter earnings slid 26% as the contract driller was hit with higher costs. The company is majority owned by Loews Corp. (L).

Shares of Diamond slipped 2.4% to $57.51 amid a broad market decline Thursday.

Write to Victoria Stilwell at victoria.stilwell@dowjones.com

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