Pride International (PDE)

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Alexander Kowalsky

Thomas Shyr

Pride International (NYSE: PDE) is a world leader in both land and offshore contract drilling services for the oil and gas industry. Pride contracts its rigs to land based and offshore deepwater oil exploration and production companies in 22 countries. With an internationally diverse fleet Pride has the flexibility to spread out its high-risk plays which also enables the company to meet demand on a global scale. As of February 19, 2010 PDE had a fleet of 23 rigs, consisting of two deepwater drillships, 12 semisubmersible rigs, seven jackups and two managed deepwater drilling rigs.^[1]

Long-established oil basins are being depleted and the incentive to expand deep water operations has increased. Pride has recognized this trend and has begun to shift its focus to deepwater oil exploration in order to capitalize on the rising demand for deep water drilling rigs. Pride’s oil exploration and production operations are primarily based in West Africa, Latin America, the Gulf of Mexico, the Mediterranean, Middle East and Southeast Asia.^[2] Pride has also been divesting its assets in land operations, selling its land-based rigs in Latin America and Norway in late 2007 in order to concentrate on the capital-intensive but highly profitable deepwater sector.

Pride International is also highly leveraged, due to heavy borrowing to cover the costs of its equipment. As a result it has to focus on long-term contracts, even more so than its competitors who have more flexible balance sheets. Pride has been trying to cut costs and increase its flexibility, but the need to focus on long term deals can prevent the firm from capitalizing on short term hikes in day rates for contract drillers. As a result Pride's revenues normally lag behind fluctuations in day rates that contract drillers charge.

Company Overview

The recent surge in deepwater oil exploration has prompted Pride to focus more on promising offshore oil and gas deposits, while the worldwide demand for energy has forced drilling companies to seek out new oil and gas deposits that require highly specialized rigs. With most contract drilling companies trying to strengthen their market presence in deepwater oil exploration, the average day-rates for deepwater rigs became more and more profitable. Despite recent demands for drilling rigs Pride has been unable to cash in on drilling opportunities because most of the company's rigs are tied up in long-term contracts. Though Pride's revenues and operating metrics have remained high and stable, other companies such as Noble (NE) have enjoyed more significant increases in revenue.

Business Financials

In 2009, PDE earned a total of $1.59 billion in total revenues, most of which was derived from long-term contracts with oil and gas companies based on a day-rate price per rig. This was a decline from its 2008 total revenues of $2.31 billion. As a result, this had a negative impact on PDE's net income. Between 2008 and 2009, PDE's net income fell from $852 million in 2008 to $246 million in 2009.^[3]

Industry Trends and Risk Factors

Pride must retain its customers, as one or two contracts lost would have serious effects

Most of Pride's contracts are with major companies that each generate close to 10% of the company's total revenue. For example, Petrobras (Pride's biggest customer) provided 16.7% of consolidated revenues. Pride's results of operations could be adversely affected if any of its major customers were to terminate their contracts or fail to renew its existing contract.^[4] By the same token, the loss of a customer would extricate some of Pride's rigs tied up in long-term contracts. This could open up the possibility for Pride to enter contracts with new companies at higher day-rates.

Rising Gas and Oil Prices will increase day rates and Pride's revenues

The dramatic increase in gas and oil prices has stimulated drilling companies to increase exploration activities as existing gas and oil deposits continue to be depleted. As exploratory work intensifies, the increase in demand for drilling rigs relates to the rising demand for oil and gas in emerging industrialized countries such as China and India. As a result, the global economic cycle has been heavily impacted by the economic growth of developing nations. Unfortunately, the Pride's returns on invested capital have rarely exceeded operation costs and as a result Pride has never made a lot of money. Its debt and reliance on long-term contracts are major obstacles to turning a profit, even in periods when day rates and oil prices are high. However, high commodity prices and strong demand will still help the company, and under the current economic conditions there will be continued demand for Pride's rigs.

High demand for deepwater oil exploration will create opportunities for PDE

Offshore drilling companies have begun to seek out promising oil and natural gas deposits at unprecedented depths because traditional oil basins are no longer yielding the same quantities of fossil fuels while worldwide demand for these fuels keeps rising. The recent increases of oil and gas costs have enabled offshore drilling contractors to engage in deepwater oil exploration that was once too expensive to pursue. The costly development of new technology to reach the most remote deposits is more economically feasible than ever due to substantial returns companies are enjoying because of higher energy costs. Pride has initiated the process of exiting the on-shore market in order to pursue more lucrative operations in deepwater plays. With 220 land-based rigs and only 60 deepwater rigs, Pride intends to grow and expand its fleet of deepwater rigs while selling its land-based rigs to finance this development. The company plans to build new ultra-deepwater rigs that drill up to 7,500 feet and earn $500,000 per day.

Severe weather conditions can stop Pride's operations, leading to lost revenues

Severe weather conditions threaten the entire offshore contract drilling industry, especially those concentrated in hurricane prone areas such as the Gulf of Mexico. Pride is especially hurt by disasters in this region, as half of its operating income comes from the Gulf of Mexico region. These areas are vulnerable to environmental disasters as witnessed with Hurricanes Katrina and Rita in 2005. By concentrating its fleet in offshore operations, Pride assumes greater risk by exposing more rigs to hurricane prone regions. A major consequence of severe weather conditions is that operating days are far less during hurricane season because storms can delay or completely halt operations for several days. Moreover, rigs can be damaged and maintaining, upgrading or replacing rigs is very expensive.

The oil and gas industry faces increasing competition from hybrid technology and renewable energy

Rising oil prices have led both consumers and companies to seek out alternative sources of energy and invest in renewable energy such as nuclear energy, solar power, wind energy, biofuels, and ethanol. As the global consumer demand shifts toward renewable energy sources due to recent environmental concerns over climate change, this change in consumer consciousness may adversely affect the oil and gas industry. As a result offshore contract drilling companies stand to lose if the oil and gas industry encounters a sudden decrease in demand.

Competition

In the offshore contract drilling industry, competition is primarily encountered on a regional basis. Historically, the offshore drilling industry has been highly cyclical, characterized by periods of high demand for rigs, limited rig supply and high dayrates often followed by periods of low demand, excess rig supply and low dayrates.^[5] Periods of low demand or excess rig supply translate into poor utilization rates. Low utilization rates indicate low profits, since almost all of Pride's revenue is generated from day-rates.

High day-rates and continual increases of oil and gas prices may indicate that discovering new deposits of fossil fuels is becoming more difficult. Among its major competitors Pride has the lowest rig utilization rate among its competitors at 71.7%, which no doubts contributes to its problems in turning a profit. Without collecting lucrative day rates, Pride cannot finance or recover the cost of its expensive drilling equipment. In an effort to curb its low utilization rate, Pride has begun to exit land based operations in order to compete more effectively in the more lucrative offshore drilling industry.

Below are listed Pride's major competitors.

• Transocean (RIG)- Transocean Inc. claims to be the world's largest offshore drilling contractor with a drilling fleet of nearly 150 highly specialized units.^[7] Transocean Inc. recently acquired the GlobalSantaFe Corporation.
• Diamond Offshore Drilling (DO)- DO owns one of the largest drilling fleets in the world, a total of 44 ships, including 30 semisubmersibles, 14 jack-ups and one drillship. DO's operations are primarily based in the Gulf of Mexico and Asia.^[8]
• Noble (NE)-has a fleet of 56 rigs: 3 drillships, 3 submersibles, 13 semisubmersibles, and 37 jack-ups.^[9]
• ENSCO International (ESV) ENSCO International's offshore rig fleet includes 43 jackup rigs, one ultra-deepwater semisubmersible rig and one barge rig. In addition, it has three ultra-deepwater semisubmersible rigs. Its operations are concentrated in the geographic regions of Asia Pacific, Europe/Africa, and North and South America.^[10]

References

1. ↑ PDE 10-K 2009 Item 1 Pg. 3
2. ↑ Pride International Corporate Website
3. ↑ PDE 10-K 2009 Item 6 Pg. 25
4. ↑ PDE 2006 Annual 10-k Report, pg.15.
5. ↑ PDE 2006 Annual 10-k Report, pg.11.
6. ↑ Rigzone.com
7. ↑ Deepwater.com
8. ↑ Diamond Offshore Drilling (DO)
9. ↑ Diamond Offshore Drilling (DO)
10. ↑ Google Finance

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