July 24, 2014 / 4:38 PM / in 3 years

UPDATE 1-Diamond Offshore sees tough winter market in UK, shares fall

(Adds details from statement and conference call, analyst comment, share movement)

By Anannya Pramanick and Tanvi Mehta

July 24 (Reuters) - Diamond Offshore Drilling Inc warned its customers in the North Sea were reluctant to sign contracts for its rigs for the winter months, overshadowing a handy quarterly profit beat that was driven by lower-than-expected costs.

Shares of the company, which also said that its midwater market is “challenging,” fell as much as 8 percent to $45.92 in morning trading.

“We are seeing an element of seasonality in the North Sea, which is pressuring rigs in this market with near-term availability,” Chief Executive Marc Edwards said on a conference call with analysts.

High operating costs and dwindling reserves in the North Sea have plagued drillers for months, with the poor weather adding to their troubles in the first quarter.

The number of oil and gas wells drilled in Britain’s part of the North Sea fell to the lowest level seen for a second quarter in at least 10 years.

Revenue from Diamond Offshore’s expensive ultra-deepwater and deepwater rigs fell as oil and gas companies shied away from drilling in the deep sea to cut costs.

Demand for offshore contract drilling is softening as vessels ordered during boom times are being delivered now, when energy companies are tightening spending.

The company, which had previously warned that 2014-2015 could be tough for offshore drillers, said on Thursday it expected the oversupply to continue into 2016.

Diamond Offshore’s midwater business, which provides rigs for drilling at 400-5,000 feet, had been the only bright spot in the second quarter, with utilization and revenue both up slightly.

The company said on Wednesday that it had idled two more midwater rigs.

“We continue to expect demand to be choppy for all their assets for the next 18 months,” RBC Capital Markets analyst Robert Pinkard said.

Diamond Offshore, whose competitors include Noble Corp and Transocean Ltd, is 50.4 percent owned by hotel, energy and financial services conglomerate Loews Corp .

In contrast, Precision Drilling Corp , which provides onshore drilling services in North America, said its business in Canada was the briskest since 2006.

Precision, Canada’s largest drilling contractor, posted a 25 percent jump in quarterly revenue and said average rig count in both Canada and the United States rose by 13 to 53 rigs and 93 rigs, respectively.

Diamond Offshore, which has one of the oldest fleet of rigs, said utilization of its deepwater and ultra-deepwater rigs fell to 51 percent each in the second quarter, from 99 percent and 92 percent, respectively.

The company earned 66 cents per share, excluding items, well ahead of the average analyst estimate of 56 cents per share.

Drilling costs of $395 million were below the company’s forecast of $405 million-$425 million.

Diamond Offshore shares, which have risen about 28 percent in the last one year, compared with a 3 percent rise in the S&P 500 Oil & Gas Drilling Sub Index over the same period. (Writing by Sayantani Ghosh in Bangalore; Editing by Maju Samuel and Sriraj Kalluvila)

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