Note: More details to come; changes are highlighted. Except where highlighted, no other section of this report has been updated.
Reason for Report: Flash Update: 1Q11 Earnings Update
Prev. Ed.: February 17, 2011, Flash Update: 4Q10 and FY10 Earnings Update
Flash News Update [Earnings Update to Follow]
On May 5, 2011, Pride International reported 1Q11 results.
Pride reported depressed 1Q11 results, hurt by higher operating expenses and lower utilization. The company’s quarterly earnings, excluding one-time items, of $0.21 per share, failed to meet the Zacks Consensus Estimate of $0.43 and was much lower than the year-earlier profit of $0.45 per share.
The company reported total revenue of $393.5 million, up 8.5% year over year, but slightly below the Zacks Consensus Estimate of $421 million.
Segmental Performance
Deepwater: The segment revenue grew 17% year over year to $259.1 million, but declined 4% sequentially, mainly due to lower utilization, coupled with higher segment operating costs from the addition of new rig capacity. The segment’s earnings from continuing operations declined 10.5% from the year-ago quarter to $78.3 million.
Average dayrate for the Deepwater fleet was $341,400 in the quarter, compared with $335,100 in the comparable quarter prior year. Of the Deepwater fleet, 91% was utilized, which remains in line with the year-earlier quarter.
As of March 31, 2011, the company had 85% of rig days for the remaining three quarters of 2011 under contract, while 75% were under contract in 2012, 58% in 2013, 46% in 2014, and 39% in 2015.
Midwater: The segment reported quarterly revenue of $99.3 million, up 5% year over year, attributable to a full quarter of utilization on the semisubmersible rig, Pride Venezuela. This was partially offset by 52 days at zero dayrate on the Pride South Atlantic for unplanned regulatory and operational issues. However, the segment’s operating earnings dropped substantially to $8.9 million from $30.9 million in the prior-year quarter.
Average dayrate in this segment was $255,200, slightly lower than $265,000 in the first quarter of 2010. However, utilization in the quarter increased to 72% from 66% in the year-ago quarter.
Currently, the company has 82% of rig days over the remaining three quarters in 2011 under contract along with 35% contracted for 2012, 14% for 2013 and none for 2014.
Independent Leg Jackup: Revenues from the segment came in at $17.1 million during the quarter, down substantially (almost 46%) from the year-ago quarter level of $31.6 million. The segment faced an operating loss of $7.1 million versus the year-ago loss of $1.2 million.
Average dayrate in this segment sank 10.3% year over year to $98,800. Utilization came in at 27% in the reported quarter, below 45% in the prior-year quarter.
Liquidity
Pride International incurred capital expenditures of $401 million in the quarter (including $338 million targeted toward the deepwater expansion program). The company expects its full-year total capital outlay to be $1.0 billion, including $763 million for the deepwater agenda.
As of March 31, 2011, cash balance stood at $45.8 million with a debt balance of $1,856.7 million, representing a debt-to-capitalization ratio of 28.9%.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON PDE.
Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]
Pride International Inc. (PDE) is an offshore drilling contractor with 25 rigs, including 4 deepwater drillships, 12 semisubmersible rigs, 7 independent leg jackups, and 2 managed deepwater rigs. The company also has 2 ultra-deepwater drillships under construction. The company's drilling rigs are deployed worldwide with operations primarily in Brazil, the U.S. Gulf of Mexico (GoM), and West Africa.
Of the twenty one firms covering the stock, ten firms provided positive ratings, eleven assigned neutral ratings, and none of the firms rendered a negative rating. The target prices range from $29.00 to $42.00. Most of the firms used P/E or EV/EBITDA multiple for their target price derivation. The firm with the highest target price rated the stock Buy and the firm with the lowest target price rated the stock Neutral.
The outlook of the firms toward PDE is dealt with in the following paragraphs:
Neutral or equivalent (52.4%; 11/21 firms): The target prices range from $29.00 to $35.00. The firms with the neutral outlook consider PDE as an appropriately valued deepwater driller that will trade largely around merger and acquisition (M&A) speculation in the short term and deepwater data points in the mid term.
However, the firms remain cautious on near-term fundamentals as the industry still needs to sort through newbuilds entering the global fleet and face muted permitting activity in the GoM. For a period of time, the firms have been cautious over the direction of dayrates given the prevalence of uncommitted floaters, however, a recent uptick in bidding activity suggests improving demand in 2011/2012 that should solve oversupply issues.
Given the completion of the company’s transformation and the recent improvement in the outlook for deepwater, the firms believe Pride is poised to move forward with its next strategic move, which may be: 1) ordering new assets, 2) acquiring assets for sale in the market or 3) participating in industry consolidation. They also believe PDE is a strategic fit for several of the higher spec offshore drillers.
Positive or equivalent (47.6%; 10/21 firms): The target prices range from $35.00 to $42.00. The firms with the positive outlook are of the opinion that Pride is the heaviest deepwater weighted offshore driller. Now that its newbuild rigs are being delivered, these deepwater investments should finally start to generate earnings and return on capital (ROC). With the largest backlog/EV in the group, the firms think PDE deserves a premium valuation.
The firms also believe Pride’s new management team demonstrated its focus on strategically transforming the company from a land rig driller into an internationally focused deepwater driller. The current deepwater construction program is expected to move the company further offshore and increase its deepwater revenues.
January 18, 2011
Overview [Note: Only highlighted material has been changed.]
Brokerage firms identified the following factors for evaluating the investment merits of PDE:
Key Positive Arguments / Key Negative ArgumentsFundamentals
· Pride International enjoys strong leverage to the positive outlook for oilfield activities in offshore Brazilian and Gulf of Mexico markets
· Debt reduction continues with the current cash flow from operations and the current earnings stream should allow the company to continue to expand with new capital additions to the deepwater fleet
· The new Pride is becoming a focused deepwater offshore driller, while upgrading its jackup fleet, shedding non-core assets, and reducing debt
· Pride remains a compelling long-term story with an investment grade credit rating and substantial contract backlog, as well as an outsized earnings growth expectation for 2011 from the delivery of new newbuild drillships
Macro Issues
· Though GoM spill-related glitches remain, deepwater is a compelling growth industry and Pride is a proven leader in the space with its engineering and product management skills
Growth Opportunities
· The global economic environment and energy demand are improving / Fundamentals
· The near-term outlook is still heavily tied to the Gulf of Mexico rig market
· In the offshore drilling business, contractors want high utilization and high dayrates. With the recent building spree, the firms expect an oversupply of jackups and more newbuilds coming for the next two years
· The mid-water floating fleet is also suffering from lower utilization and a lack of tenders from the exploration and production (E&P) operators as they recover from the financial crisis
Macro Issues
· Political risks associated with operations in the Middle East and volatile oil and gas prices
· Foreign currency exposure
· The offshore drilling sector is cyclical, seasonal and susceptible to external shocks, which may lead to volatility
· Lower-than-expected day rates and utilization
· OPEC supply/demand economics and U.S. Patriot Act
Houston, Texas-based Pride International Inc. (PDE) is a leading offshore contract driller with operations in many of the active oil and natural gas basins of the world, including South America, the Gulf of Mexico, West Africa, the Mediterranean Sea, the Middle East, and Asia Pacific. It offers services through the use of mobile offshore drilling rigs in the United States and international waters. It also offers rig management services on various rigs, including technical drilling assistance, personnel, repair and maintenance, and drilling operation management services. As of November3, 2010, the company operated a fleet of 25 rigs, consisting of 4 deepwater drillships, 12 semisubmersible rigs, 7 independent leg jackups and 2 managed deepwater drilling rigs. Pride International also has 2 deepwater drillships under construction.
For more information about the Company visit, http://www.prideinternational.com. Pride operates on a calendar year basis.
January 18, 2011
Long-Term Growth [Note: Only highlighted material has been changed.]
Pride International has a long history of providing service to the oil industry. Pride has transformed itself over the last few years under a new management team, which has refocused the company on deepwater and offshore drilling rigs with international operations. The team has reduced debt, sold the land business in South America, and signed contracts to build five deepwater drillships. The new Pride is becoming a focused deepwater offshore driller and the firms expect further development of its deepwater presence going forward.
With three drillships under construction, the company is expanding its presence in deepwater. The jackup fleet is continuing to be upgraded under new contracts. The spin-off of its mat jackup fleet completed the company’s restructuring. The sale of its land business as well as the sale of its platform business have helped Pride shed non-core assets and freed up capital for offshore investments. Debt reduction continues with cash flows from operations and the current earnings stream will likely allow the company to continue to expand with new capital additions to the deepwater fleet.
While the outlook for offshore drillers has improved in 2010, the standard jackup and market mid-water floating market continue to be oversupplied and the deepwater market could also face softness in 2011 depending on the demand from operators, especially Brazil, West Africa, and the return of normal operations in the Gulf of Mexico. Despite these uncertainties, the market has stabilized and is improving.
January 18, 2011
Target Price/Valuation [Note: Only highlighted material has been changed.]
Provided below is the summary of valuation and ratings as compiled by Zacks Digest:
Rating DistributionPositive / 47.6%
Neutral / 52.4%
Negative / 0.0%
Average Target Price / $35.94
Digest High / $42.00
Digest Low / $29.00
Number of Firms with Target Price/Total No. / 17/21
The major impediments to the target price include deteriorating deepwater supply-demand dynamics, fallout from the GoM moratorium and lack of pricing power. The offshore drilling business has many uncontrollable variables that could impact the target price. Such variables could include war in the Middle East, changes in demand from consumers, weather related delays, embargoes by exporting countries, adverse tax consequences from government regulations, and changes in government regulations among others.
Recent Events [Note: Only highlighted material has been changed.]
On November 4, 2010, PDE reported its 3Q10 earnings update. Highlights are as follows:
· Total revenue was $346.2 million compared with $386.1 million in 3Q09.
· Net income from continuing operations were $42.8 million compared with $79.9 million in 3Q09.
· Earnings per share (EPS) from continuing operations were $0.24 compared with $0.45 in 3Q09.
Revenue [Note: Only highlighted material has been changed.]
The company reported total revenue of $346.2 million, down 10% year over year (y-o-y) from $386.1 million in 3Q09.
Segment Details
Deepwater: This segment’s revenue increased 12.7% y-o-y to $216.2 million. However, the segment’s revenue dropped 2.8% sequentially, mainly due to approximately $30 million unrecognized revenues related to a client dispute on payment for 60 contracted days during inspection of a rig.
Average dayrate for the Deepwater fleet was $294,800 in the quarter, compared with $340,800 in 2Q10 and $343,200 in 3Q09. Of the total Deepwater fleet, 95% was utilized, compared with 90% in 2Q10 and 76% in 3Q09. As of September 30, 2010, the company had 100% of available rig days in its Deepwater segment under contract for the balance of 2010, 83% for 2011, 67% for 2012 and 55% for 2013.
Midwater: The Midwater segment reported quarterly revenue of $86.2 million, down 12.2% y-o-y and 3.5% sequentially. The decrease was mainly due to lower utilization levels.
Average dayrate in this segment was $269,800, slightly up from $269,700 in 2Q10 and up 2% from $264,100 in 3Q09. Utilization in the quarter decreased to 58% from 61% in 2Q10 and 67% in 3Q09. Currently, the company has 81% of available rig days contracted for 2010, 78% for 2011, 35% for 2012, and 14% for 2013.
Independent Leg Jackup: Revenue from Pride’s 7 Independent Leg Jackup rigs came in at $24.7 million during the quarter, down substantially from 3Q09 revenue of $72.8 million, but up 14% sequentially.
Average dayrate in this segment increased sequentially from $87,000 to $92,400, but dropped from $123,100 in 3Q09. Utilization increased from 39% in 2Q10 to 41% in 3Q10, primarily attributable to a full quarter of service on the Pride Montana. However, utilization dropped significantly on a y-o-y basis.
Margins [Note: Only highlighted material has been changed.]
In 3Q10, operating costs (excluding depreciation and amortization) was $213.0 million, compared with $210.6 million in 3Q09 and $217.9 million in 2Q10. Depreciation and amortization (D&A) in 3Q10 came in at $46.7 million, up 18.2% y-o-y and 4.5% sequentially. General and administrative (excluding D&A) in the quarter was $22.6 million, down 25.2% y-o-y and 11.4% sequentially.