Pride International Q4 2008 Earnings Call Transcript

Pride International, Inc. (PDE)

Q4 2008 Earnings Call

February 19, 2009 11:00 AM ET

Executives

Jeffrey L. Chastain - Vice President, Investor Relations and Communications

Louis A. Raspino - President, Chief Executive Officer and Director

Brian C. Voegele - Senior Vice President and Chief Financial Officer

Randall D. Stilley - Chief Executive Officer - Mat-supported Jackup Business

Kevin C. Robert - Sr. Vice President - Marketing and Business Development

Analysts

Geoff Kieburtz - Weeden & Co

Michael Urban - Deutsche Bank

Robin Shoemaker - Citigroup

Arun Jayaram - Credit Suisse

Ian Macpherson - Simmons & Company

Truls Olsen - Fearnley Fonds

Collin Gerry - Raymond James

Michael Drickamer - Morgan Keegan & Co.

Presentation

Operator

Thank you for waiting and welcome to the Pride International Fourth Quarter and Full-Year 2008 Earnings Call. Today's conference is being recorded. As a reminder, your lines are currently muted and will be opened at the end of the formal presentation for a live question-and-answer session.

I am pleased to introduce your conference host today, Jeff Chastain. Please go ahead, sir.

Jeffrey L. Chastain

Thank you, Tina and good morning. And thank you for joining us this morning on today's review of fourth quarter and full-year 2008 financial results of Pride International. A copy of the press release issued this morning is available on the company's website along with the financial statements and supporting schedules. You will find that at prideinternational.com.

Joining me on the call this morning are the following executive officers of the company. Louis Raspino, President and Chief Executive; Rodney Eads, Executive Vice President and Chief Operating Officer; Brian Voegele, Senior Vice President and Chief Financial Officer; Randy Stilley, Chief Executive Officer of the Mat-supported Jackup Business; Kevin Robert, Senior Vice President of Marketing and Business Development; and Len Travis Vice President and Chief Accounting Officer.

Before I turn the call over to Louis, I'll once again remind you that during the course of this conference call, certain forward-looking statements may be made. These statements may relate to among other things our expectations of future performance, demand for drilling services, future results and cash flows and completion of asset sales. Any such forward-looking statements in addition to other information discussed in the call are within the Safe Harbor provided by Federal Securities Regulations. These statements reflect our current views that actual results could differ materially from those projected due to the factors discussed in the call or in our filings with the SEC. Those filings are posted on our website; again that's prideinternational.com

Also note that we will use various numerical measures in the call today, which are or maybe considered non-GAAP financial measures under Regulation G. You'll find the required supplemental financial disclosure for these measures including the most directly comparable GAAP measure and an associated reconciliation on our website. And, with that, I'll now turn the call over to Louis.

Louis A. Raspino

Okay. Thanks, Jeff and welcome to everyone on the call this morning. Following my opening comments, as usual; Brian's going to give you our financial results, then Randy Stilley the CEO of our Mat-Jackup Business is going to comment on that business environment and the outlook for that segment. Kevin will give as usual marketing perspective, then I'll return for some closing comments on the status of the planned divestiture of our mat-jackups and on contract opportunities for our PS4 new build drillship.

Now, with four presenters on the call today, we're going to try to move along as quickly as possible, but we're probably going to go a little longer than usual. We'll keep plenty of time at the end for questions and as always, we're around all day for one-on-one questions.

Now turning to our fourth quarter Pride turned in yet another record quarter and a record year for revenues and earnings from continuing operations. And for the quarter we exceed the high-end of our guidance. Again, our strong financial performance was driven by yet another strong quarter of operating performance, with utilization of our deepwater fleet at 98%, our midwater fleet at 94%; which was the highest level achieved in all of 2008, and utilization of our IOC jackup business at 98%, and a decrease in operating costs over Q3; that Brian is going to give you details in a minute.

The full year 2008 was best characterized by our continued and consistent execution of our long-term strategic plans, to create a unique investment choice in the offshore drilling universe. We have significantly expanded our presence in the deepwater segment, where we believe the best long-term prospects for growth exists. By adding two drillships to our ultra deepwater fleet during the year, bringing the total to four under construction. And we added over $5 billion in deepwater contract awards and including bonus opportunities, which includes contracts on three of the four new builds.

Our revenue backlog at December of 2008 stood at $8.6 billion or $9.2 billion inclusive of bonus opportunities. And this is expected to provide contracted revenue of approximately $1.5 billion to $2 billion for each year of the next four years. This backlog, which represents about 300% of our market cap, which is more than double from most of our peers, provide significant growth significant cash flow visibility and significant downside protection in today's troubled economic climate. 95% of our backlog is with several of the worlds largest IOCs and NOCs, which are very high credit quality clients and 87% of our backlog is with just three clients, Petrobras, BP and Total.

The growth at our ultra deepwater fleet has allowed us to expand our client base with two of the world's most active, deepwater NOC's and IOC's, that's Petrobras and BP. And very importantly to establish a strategically important position in the ultra deepwater Gulf of Mexico, adding two our already strong position in the other two strategic deepwater basins in the world that is Brazil and West Africa.

The divestiture of our tender rigs, our platform rigs and the remaining land rigs during 2008; brings our total proceeds for non-core asset sales to $1.6 billion. And following these divestitures, we exited the year having completed the transition of the company to a pure offshore business model which we've been moving toward over the past three years. And following the planned divestiture of our mat-jackups in '09 we will have completed one of the most dramatic extreme corporate makeovers in recent years.

Now to emphasize this point, let me remind you that in 2004 floating rigs accounted for only 25% of price revenue. In 2008 that has grown to 57%, reflecting our deep water investments and our non core asset sales, and by 2012 we estimate floating operations will account for approximately 95%of our revenues, following the divestiture of our mat-jackups and the start up of our four new build drillships. This will truly be a unique position in our industry.

On an EBITDA basis, the floating rig segment of our business already accounts for 77% of our total EBITDA, in the fourth quarter of '08. And again, this number is prior to adding four new drillships, re-pricing several of our existing deep water contracts from older legacy dated contracts, this will occur in the 2010-2011 timeframe; and again the divestiture of our mat-jackups. And throughout this entire transition, we've continued to execute the financial discipline and improve our financial strength with net debt, at the conclusion of '08, essentially at zero.

Moving forward, we know '09 is going to be characterized by reduced spending by some customers, resulting in the challenging industry environment, especially in the jackup and mid-water sectors, where rig counts are falling sub-lease activity is building and day rates are coming down. In contrast, we believe the deepwater segment will be more resilient. Due to the large amount of development drilling, long planning horizons by our customers and a long term view of commodity prices, recently announced exploratory successes and large backlog associated with this type of work.

In fact, we're seeing several recent announcements by major deepwater operators of their plants to not only hold steady, but in some cases significantly increase drilling plans for deep water. Kevin will go over there in some more detail.

Although given the worldwide economic crisis, the record level of revenue and earnings we've put in over to past several years by our industry, will take a pause in '09. But we believe our company is in the best position ever to prosper through an industry downturn. We enter '09 with excellent contract coverage, 96% of our available rig days are under contract and our deepwater fleet, 97% of our mid-water fleet is under contract and 76% of our IOC jackup rig days is under contract.

With that I will turn the call over to Brian for a financial review.

Brian C. Voegele

Thank you Louis and good morning. I'm going to take a few minutes to highlight key drivers of our financial performance for the fourth quarter of 2008 and as I've done in the past, comment on what to expect for the coming quarter. The company reported another strong quarter driven by excellent operating performance.

As Louis already mentioned, continued strong performance in the deepwater fleet and considerable utilization improvement in our mid-water and independent leg jackup fleet, drove income from continuing operations to a record high of $197 million or $1.14 per diluted share. These record results included a small gain of $3 million or one penny per diluted share stemming from the recognition of deferred gains associated with the sale of the company's platform rig fleet earlier this year.

Excluding the gain, earnings from continuing operations were $1.13 per fully diluted share and exceeded fourth quarter guidance of $1.04 to $1.09. $0.03 per share of our out performance was related to the favorable resolution of the custom's duty case during the quarter. Excluding this item along with the gain from asset sales, earnings from continuing operations would have been $1.10 per fully diluted share and exceeded our original guidance as a result of better than expected operating results from our deepwater fleet and our jackup fleet.

EBITDA for the fourth quarter was $308 million, an increase of $11 million or 4% from the third quarter, largely as a result of higher utilization and average daily revenue in our midwater fleet. The EBITDA contribution of our floating fleet reached $238 million in the fourth quarter, or 77% of total fourth quarter EBITDA.

Revenues in the fourth quarter of 2008 were $622 million, representing an increase of $15 million over third quarter revenues of $607 million. This revenue improvement was driven largely by performance in our floating fleet, where revenues for the fourth quarter were $383 million up 6% when compared to the third quarter. Revenues contributed by the midwater fleet were $25 million higher in the fourth quarter, than the previous quarter with both the Pride Mexico and the Sea Explorer, working in the entire fourth quarter, following mobilizations during the third quarter ahead of new contract commencements.

This resulted in an improvement utilization for the midwater fleet to 94%, the highest level achieved in 2008, and up from 84% in the third quarter. Further contributing to the midwater fleet's revenue improvement, the Pride Venezuela commenced a new contract at $375,000 per day, an increase from its previous contracted day rate of $270,000. These improvements resulted in a corresponding increase in the midwater fleet's average daily revenue to $279,500 for the fourth quarter from $259,300 in the third quarter.

Fourth quarter revenues for the deepwater segment decreased $4 million from third quarter levels; primarily as a result of the Pride Rio resuming operations under its original contract with Petrobras after completing its farm out to another operator at a higher day rate during the third quarter. Also, negatively impacting revenues from the deepwater segment for the quarter; The Pride Carlos Walter experienced nine days of downtime to complete BOP repairs. Average daily revenues for the deepwater segment decreased slightly to $331,300 per day in the fourth quarter, compared to $333,600 per day in the third quarter as a result for these two events.

Utilization of the deepwater fleet was an impressive 98% during the fourth quarter and remained unchanged from the third quarter. Revenues from our independent jackup rigs increased 11% to $83 million in the fourth quarter, from $75 million in the third quarter. Both' the Pride Cabinda and the Pride Pennsylvania experienced less out of service time in the fourth quarter than during the third quarter, resulting in an increase in the utilization for the independent leg fleet to 98%, up from 93% in the third quarter.

Also, contributing to higher revenues in this segment, was the commencement of new contracts at higher day rates on the Cabinda, and a full quarter of operations for the Pride Montana.

Our mat-supported jackup rigs segment had revenues of $124 million in the fourth quarter, down 9% from a $136 million in the third quarter. As declining natural gas prices and the deepening of the global credit crisis, began to negatively impact client spending in the region. Fleet utilization declined to 69% in the fourth quarter from 84% last quarter. During the first quarter, we expect to experience further declines in utilizations of mat-jackup fleet. Randy will provide more color on this segment in a few minutes.

Total operating costs for the fourth quarter were $285 million, or approximately $6 million lower than the prior quarter operating costs of $291 million. Third quarter operating cost include a $7 million accrual associated with the disputed customs claim. During the fourth quarter this dispute was resolved causing a partial release of the reserve, approximately $5 million in income and resulting in a favorable variance in operating costs relative to the third quarter of $12 million.

In addition, fourth quarter operating costs also reflected reduction in reimbursable cost of $2 million. Offsetting the favorable variance from the third quarter for these two items, activity related differences along with demobilization costs, primarily related to jackups returning to the U.S. from Mexico, resulted in $10 million higher operating cost during the fourth quarter.

Adjusting for these differences, operating costs declined during the fourth quarter by about 1% from third quarter level. Our effective tax rate in the fourth quarter declined to 24% from 27% in third quarter, driven by discreet tax adjustments from the third quarter of 2008 and a more favorable mix of profits from lower tax jurisdictions in the fourth quarter. We currently expect our 2009 operating our 2009 effective tax rate to run in the mid 20% range. Until the divestiture of the mat jackup fleet is complete, after which the rate is expected to adjust lower.

Now looking ahead to the first quarter; we expect a decrease in earnings from operations of approximately, $59 million from the fourth quarter of 2008 levels. Resulting in earnings per share, fully diluted of $0.85 to $0.90. This decrease is driven largely by lower expected revenue contribution from both our deepwater fleet and our mat-jackup fleet. Revenues from our deepwater fleet are expected to be approximately $29 million lower during the first quarter; $13 million stemming from planned shipyard time (ph) on the Pride Brazil, which is undergoing a special periodic survey and a water depth upgrade to 1700 meters.

In addition, unplanned downtime in the Pride North America reflect repairs to its drill works is expected to result in a revenue loss of $7 million in the first quarter. The remaining $9 million is related to out of service time for planned maintenance, spread throughout the rest of deepwater fleet and lower expected performance bonuses.

In addition, with the stacking of seven mat-jackups in the Gulf, utilization in this segment is expected to approach 60% and day rates trending lower. Revenue contribution from our mat-jackup fleet is expected to be approximately $29 million lower in the first quarter than in the fourth quarter. On the cost side of the ledger, we expect first quarter operating cost to be about $11 million lower than fourth quarter operating cost. $7 million of this decrease relates primarily to lower demobilization cost incurred during the first quarter.

In addition, during the first quarter we expect to experience 119 days in the shipyard or mobilizing compared to 29 days during the fourth quarter. The increase in days spent in the shipyard or mobilizing both activities were certain portion of our calls are deferred or capitalized is expected to result in about $3 million lower operating cost.

In addition, the termination of the Mad Dog deepwater management contract by our customer as a result of loss of the drilling package in Hurricane Ike is expected to result in a further reduction of $3 million in operating cost during the quarter. Offsetting these favorable items first quarter cost related to rig importation are expected to be $5 million higher then fourth quarter for favorable reserve adjustment recorded. Taking these specific activity differences into account underlying operating cost in the first quarter is expected to be essentially flat with the fourth quarter.

For the balance of the year we generally expect operating cost to be flat to slightly to lower. With the lower activity levels industry wide, the upward cost pressure that we've experienced for the last few years, appears to be moderating. At the same time with the large number of new builds yet to be delivered in the industry and the considerable backlog built by some equipments suppliers. We believe that there will be certain areas where vendor pricing will not quickly respond to the declining activity level in the industry.

Our balance sheet, continue to show improvement as we close 2008, with cash and cash equivalents of $713 million up from $428 million at the end of the third quarter, double debt closed the year at $723 million, for a debt to total capital ratio 14%. Well below our stated target level of 20 to 40%. Of the $723 million in debt, $500 million represents our senior notes that do not mature until 2014. The balance of our debt portfolio consists of loans amortized by cash flow, from two separate deepwater semi loan under contract in Brazil until 2016.

Annual maturities on these loans are approximately, $30 million. With our senior notes maturing more than five years from now and scheduled principle payments on deepwater semi loans essentially self funded by existing contracts with Petrobras; we are not faced with the near term prospects of extending maturities or raising new capital to refinance our existing portfolio in the current capital market down draft.

Nor does our debt service cause us concerned in light of anticipated cash flow. In December, we entered into a new unsecured revolving credit facility, providing availability of up to $300 million. The facility has an accordion feature that would under certain circumstances allow to company to add additional vendors to increase availability under the facility, to up to $600 million. At present this facility is un-drawn and serve as a cushion should short term cash needs exceeds cash available.

Being able to complete this new revolver in the middle of the broad capital market meltdown that took place in the fourth quarter and at the same time, moving from a non-investment grade style secured facility to an unsecured facility with investment grade features is a strong indication of our financial strength and the confidence that our bank group has in us.

As a result of the new facility, our credit rating was upgraded by Moody's to Ba1 was a positive outlook for further ratings changes to investment grade. S&P also has a similar rating with a positive outlook for increase to investment grade. Our capital expenditures in 2008 were $984 million, and are expected to total an estimated $1.1 billion in 2009, with approximately $760 million associated with the construction of the four deepwater drillships. Consistent with my previous comments on the matter, we continued to believe that our current cash position combined with our projected cash flow from operations in 2009 will be sufficient to fund our capital expenditures during the year.

Now I will turn the call over to Randy for his thoughts on the Gulf of Mexico and our mat jackup segment.

Randall D. Stilley

Thanks, Brian. To begin with, I'm pleased to announce the name we will be giving spinoff company is Seahawk Drilling. We are in the process of developing a logo, designing our website and selecting a ticker symbol to be used after the transaction. I'll begin my comments with an update on the status of our 20 rig mat-supported jackup fleet. In the U.S. Gulf, we currently have six rigs under contract, one in the shipyard for repairs, two idle and five stat.

In Mexico, we currently have six rigs under contract with Pemex. However, we've been advised by Pemex that they plan to release the Pride Arkansas at the end of its contract later this month. If this occurs, we plan to cold stack the rig in U.S. upon completion of the contract, leaving us with five rigs in Mexico in addition to Pride's two IOCs. The outlook for the first half of 2009 in the U.S. is weak as low commodity prices, our customer's lack of access to capital and diminished world economics are leading to sharper reductions in capital spending than previously expected.

We appear to be heading towards the sharpest downturn in jackup activity in over 20 years. And there is little to no visibility on when drilling activity in the Gulf of Mexico will recover. Currently, there are only 40 jackups under contract in the U.S. Gulf of Mexico, out of the marketed supply of 57 rigs. And it appears that activity will decline even further based on the lack of new drilling plans and permits

Our strategy in this environment, is to work a smaller number of rigs at reasonable day rates, and to cold stack rigs with no near term prospects. We plan to keep one oil rig fully crewed and ready for work, but with the stack the rest until activity recovers. Based on current demand, we plan to stack two additional rigs and reduce our U.S. rig-based workforce by about a third. This plan should result in savings of about $30 million on an annualized basis.

The outlook for Mexico is somewhat better for the first half of 2009. With the majority of their production hedged to $70 a barrel, Pemex has previously indicated the need for about 12 incremental jackups. First group of contracts for seven jackups was announced last month, but Pemex publicly said it was deferring the awards until a later date. Additionally, they have planned another tender for five to eight incremental 300 and 350 foot IOCs for the work starting during the last half of 2009. These contracts are expected to pull additional jackups from the U.S. market.

While the Pemex incremental requirements are generally for independent leg rigs with water depth ratings of 250 feet or more. We believe, there will continue to be opportunities to utilize mat-supported rigs as well. In addition to the rigs we currently have in Mexico, we maybe able to mobilize some of our 250 mat slot and 250 mat cantilever rigs located in U.S. to Mexico. And we are currently working with Pemex to identify drilling programs on their schedule that might fit with these rigs.

With most of the drilling activity on the U.S. shelf driven by natural gas, we do not expect to recovery until gas prices rebound. Current prices in the $4.50 range, will probably not support drilling of 2 to 3Bcf prospect, no matter what the day rate is on the rig. However, operators with better prospects and strong balance sheet have indicated they plan to take advantage of lower overall service process and will likely to continue to drill in this environment. As bad as the current environment is, day rates are still above the cycle peak we saw in 2001due to industry consolidation and a huge reduction in the supply of rigs in the region.

As a result I do not expect day rates to reach cash operating cost on our rigs working during this downturn. Furthermore, with U.S. land drilling activity rapidly declining, depletion rate should eventually lead to lower production followed by a rebound in natural gas process. As we've experienced many times in the past this should result in a recovery in shallow water drilling in the Gulf of Mexico and we'll be well positioned when this occurs. I'll now turn it over to Kevin for his comments.

Kevin C. Robert

Thank you Randy. This morning I am going to review our outlook for expected activity in the deepwater, mid-water and international jackup markets; then make a few comments about how we expect the market to be impacted by new building and floater deliveries. Then I'll conclude with a few comments on contract prospects for Pride's floater fleet.

Deepwater markets which we define as water depths of 4500 feet and greater have a high percentage of rigs under contract. This sector of the offshore market is the least influenced by near term commodity prices as deepwater clients plan their business with five to 10 year outlooks. They secure drilling equipments for execution of there long term programs as evidenced by the contract backlog of the existing deepwater fleet which has an average contracted term per rig of three years, according to information of ODS-Petrodata. 94% of the 103 deepwater MODUs are under contract in 2009.

Looking forward into 2010, 85% of the fleet is contracted and in 2011, 78% is under contract assuming no uncontracted rigs roll over from the previous year. This percentages include the addition of new build deliveries which when accounted for will grow to deepwater fleet from a 103 rigs in 2009 to 181 rigs at the end 2011.

In the short term, the pace of contracting for deep water rigs has slowed as compared to the last couple of years, but multiple requirements for rigs are still being discussed. Right now, there are two major deepwater tenders in the market as ONGC is looking to contract two deepwater MODUs and Petrobras is conducting a market enquiry for an unknown quantity of deepwater rigs. We believe both companies have timed their tenders to try and take advantage of the perceived short-term softness in the current market as we believe they expect deepwater rig rates to strengthen in the future.

Midwater floater markets which we define as water depths from 1000 to 4500 feet of water have peaked and are under utilization pressure which we expect to result in lower day rates for new contracts. Although, the midwater fleet has an average contract term per rig of two years, 20 of 112 midwater floaters are available for contracting in 2009, which is 18% of the fleet; in 2010, 28% of the fleet is available. These percentages also include the addition of new build deliveries which when accounted will grow the midwater fleet from a 112 rigs in 2009 to a 119 rigs by the end of 2011.

Midwater market is largely driven by smaller operators that are quickly affected by the liquidity crunch caused by low commodity prices and restricted access to capital markets. We expect midwater markets to slow in 2009 and offer very limited opportunities for new contracts, especially in the 1500 foot water depth class. There is lack of tendering in the midwater market and we have seen some midwater programs, representing about two rig years of demand postponed due to project economics. Farm out inquires are also increasing due to midwater program budget cuts. Therefore we expect rigs rolling off contract in 2009 to have difficulty in gaining new contracts.

Turning to international jackups; as we expected international jackup market is adjusting to a lower commodity price environment as utilization of the existing jackup fleet is declining. The fleet has a 173 rigs available for contracting in 2009, including 21 un-contracted new builds. This represents 48% of the 363 rig international fleet, including the 35 new builds to be delivered in 2009. Another 24 new jackups will join the fleet in 2010 of which 22 are looking for contracts.

We expect most of the new jackups will have to displace incumbent rigs to find work. Recent day rate proposals are off about 50% from peak rates of July 2007, and we expect further softness. Recently a dozen jackups were proposed for a one rig tender in India, which further demonstrates excess rig supply over demand. At this time, we don't see any demand growth in the international jackup markets other than Mexico, which was mentioned by Randy

Now, turning to new build rigs, I want to make a few comments on how we see planned deliveries of new build floaters impacting the market. In the floater market, about 87 deepwater floaters are currently scheduled for delivery during the period, 2009 to 2012. 100% of the 28 floaters scheduled for delivery in 2009 are under contract with average contract terms of five years. In 2010, we expect another 24 floaters to be delivered with 18 under contract, with an average term also of five years. In 2011 and 2012, another 35 floaters are scheduled to be delivered, of which 15 are under contract. So, of the available 26 deepwater new builds, 16 are owned by companies with no history of deepwater operations. We believe these companies face significant challenges to deliver and operate these rigs, and we do not expect many existing deepwater clients to consider using these rigs without a change in operatorship from an established contractor.

We also expect that some of these rigs might not even be completed as a number of floaters still need financing. In Brazil, Petrobras and a number of the foreign operators continue to move aggressively to exploit their prospects in Brazil's emerging pre-salt play. Petrobras's five year plan targets 28 billion with their pre-salt projects; this is part of Petrobras's $174 billion five year investment plan, which is a 60% increase over the previous five year plan.

In pre-salt early production will commence in 2009 and is expected to exceed 200,000 barrels per day by 2013. Production from pre-salt fuels is forecasted to grow to over 1.8 million barrels of oil per day by 2020. Petrobras will need to add a large number of high specification MODUs over the next 10 years to accomplish these goals.

Combined with the recent announcements by Exxon Mobil, Devon and BG of new discoveries, we expect increased MODU demand in Brazil and believe that some of the existing new builds without contracts will likely to be committed to work for Petrobras. We are also expecting Petrobras to issue a tender for up to eight new rigs to be built in Brazil. This tender could be in the market early in the second quarter. We expect that Petrobras will need to contract existing rigs, for filling gaps in their schedules while these new rigs are under construction, creating even more demand for deepwater rigs early next decade.

I'd like to briefly now discuss a few prospects for our floater fleet. Our existing deepwater fleet has only the Pride South Pacific with any potential available time on it in 2009, if an option for work late this year is not exercised. If that option is not exercised, then we cannot find a short one well job and we plan to take the rig to the yard for its required five year class survey in the fourth quarter of '09 instead of the first quarter of 2010.

We are currently discussing it with a couple of clients, a new contract for the Pride South Pacific after completion of the shipyard work. With our midwater fleet Chevron, ENI, Petro SA and OGX are our clients. We have one midwater semi available in 2009 as the South Seas is expected to finish its contracted program in South Africa some time in the third quarter. We're looking for a new contract and have a couple of prospects, but it will likely involve moving the rig to another region. So, we expect some downtime between contracts.

Our seven rig international jackup fleet has 76% of it's days contracted in 2009 and we're currently working on adding backlog to the Wisconsin and the Cabinda. In closing, we recognize the importance of continuing capital investment in the E&P business in order to satisfy world growth and demand for crude oil and natural gas. Although, demand is declining at present depletion rates are eroding the existing production base worldwide. New supplies have historically not kept up with the depletion rates, and this is becoming even a bigger challenge as reserves become harder to find and produce.

Deepwater is one of the few places our clients can have access to world-class reserves. Since the middle of 2008, numerous deepwater discoveries have been announced in addition to the ones Petrobras has announced in Brazil. Nobel Energy, Israel has a major gas find in 5600 feet of water. Anadarko announced two Gulf of Mexico; United States, Gulf of Mexico deepwater discoveries in over 5000 feet of water. Elf (ph) Energy's, Rico's discovery in Equatorial Guinea is in 5000 feet of water. BP Angola announced its 16th discovery in the ultra deepwater block 31 in 6600 feet of water. Exxon Mobil, Devon and BG, all announced discoveries in Brazil's pre-salt play and water depths that range from 4600 to more than 7000 feet of water.

Shells Vicksburg discovery in the U.S. Gulf of Mexico was in 7500 feet of water. Total announced discoveries in deepwater Nigeria as well as continued discoveries in Angola deepwater block 14 and ultra deepwater block 32. These discoveries continue to confirm the growth of established deepwater basins but we are also seeing basins emerging in ultra deepwater India, deepwater North Africa, deepwater South East Asia, and the Black Sea.

When we consider the deepwater clients have high expectations for exceptional safety, proved competency, growing performance and rig specifications like our new drillships, and that Pride International is one of the few drillers that has proven we can meet those needs, its easy to understand why we are so excited to bet our company and the success we have had in positioning ourselves to benefit from the long term growth in the deepwater business.

Thank you and now let me turn the call back over to Louis.

Louis A. Raspino

Thank you Kevin. Despite the current business environment, our strategic focus is unchanged. Our business model has become highly focused and efficient compared to 2005, when we had ownership in over 200 land based rigs and then a variety of lower return low spec offshore assets. The final step in our transformation to a premium offshore high speed drilling contractor is the divestiture of the mat-jackup business.

I've just a few comments on the status. We've made considerable progress since we started this in 2008. And our expectation remains to complete the transaction in 2009, most likely by the middle of the year. Randy Stilley has selected the senior management team and this team is now running the business on a day-to-day basis. We filed the Form 10 with the SEC in December and we're working with the IRS on our tax release. We do not expect to review periods of the SEC or the IRS to threaten or bully to complete the transaction on our anticipated time schedule.

We continue to expect the transaction to be structured as a tax free spinoff to price shareholders. And we expect the balance sheet of the Spinco may have some debt, but depending on market conditions, but not at a level to hinder operations of the business or discourage investor interest in any way.

The present weak state of the U.S. shallow water drilling sector shall not prevent to us from divesting this business. And we believe separation of the business will strengthen both businesses and will eventually lead to more appropriate valuations that will reflect each company's unique business focus, thereby creating value for both sets of shareholders. Now, Pride will remain as an offshore driller with the unique focus on the floating assets sector, especially deepwater high speed drilling assets. And Spinco will be a small cap pure play shallow water driller focused on the U.S. Gulf of Mexico, natural gas store.

Now turning to the status of our fourth drillship under construction, the PS4, which is presently un-contracted, let me address a couple of issues. The rig is scheduled for delivery in late 2011, or approximately three years from now. Due to the current economic uncertainty customer interest is not as robust as it was six months ago, when we put the rig on order. Although customers are not presently displaying an urgency to contract a rig with the delivery in three years, we are receiving customer interests from both NOC's and IOC's in both established and emerging markets.

We continue to consider contract durations for the unit of from three to 10 years. However with three more years before this rig is ready for its first assignment, that's plenty of time for oil prices to stabilize and for clients to plan additional spending with more conviction. And, remember this would be one of the world's most capable rigs, with specifications that are needed from many of the emergency the emerging development programs that Kevin discussed, particularly offshore Brazil and the deepwater Gulf of Mexico.

In short we're not concerned the rig is currently with a contract. Given our long term bullish view of the deepwater market we're not in a rush to contract this rig nor are we holding it off the market. We'll work continuously with clients about the unit and bid appropriately on deepwater tenders, understanding there is a trade off between rate and certainty.

We do not know when we will contract this rig, it could be next month, it could be next year. The worldwide economy is too uncertain to more specific. But again, we believe long term this rig will be a tremendous asset for Pride and we'll play right into strength of the ultra deepwater market's growing need for high spec assets.

And in conclusion, we are the near the end of our strategic transformation and we believe the long term industry trends remain in place quite favorable for deepwater. The deepwater play is expected to be resilient in the current environment and grow over the long term. Pride is a proven leader in deepwater operations, in deepwater engineering and the deepwater project management. Our engineering and operations teams have constructed 15 of the world's deepwater rigs. We expect to continue expanding our premium deepwater asset base. Although, quite frankly, this is not a high priority today given the rapid growth we already have wired into Pride in the state of the capital markets.

Strong revenue backlog is in place with quality customers and with quality contracts. We're achieving record financial performance, we have the financial strength, the liquidity and a financial discipline as we enter uncertain times. And we believe we're poised for industry leading long-term growth over the next several years with projects that are already in the pipeline with repricings from our remaining legacy contracts and when our four new builds come onstream. Thank you. With that I'll turn it over to Jeff.

Jeffrey L. Chastain

Thanks, Louis. Tina, we're now ready to go ahead and begin addressing the questions that are in the queue. And while you're getting things set up with the first question, I'll remind everyone that we'll follow-up again one question and one follow-up rule to allow us to address as many questions as possible in the time remaining. Thanks.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). We'll take our first call from Geoff Kieburtz.

Geoff Kieburtz - Weeden & Co

Thanks very much. Good morning. I actually just have one question to Randy and to someone from the Continuing Pride in regards to how you think about the prospect of increased downtime for the rigs? Jackups, mat-jackups, international jackups in the midwater fleet. How long will you keep a rig ready to go before cold stacking it? How do you think about the tradeoff between utilization and day rig?

Randall Stilley

I'll start off Geoff, and address that as it reflects our business in U.S. Gulf of Mexico. In this kind of a market with what we're seeing today with very little visibility, we will not wait very long to cold stack an out rig. If we see some opportunities for a rig, we will keep it ready. And if we see things start to improve, we might even consider warm stacking rig rather than cold stacking. But I think, with the current situation that we have, if we don't see any opportunities for a rig over the next 30 days, we are likely to go ahead and cold stack that rig, take it off the market and wait till things improve.

Louis Raspino

And Geoff, this Louis; from the Pride perspective fortunately, we're not faced with too many decisions right now, on whether to stack rigs, with the backlog we have and with the contract coverage we have entering '09 is as I discussed. That being said, it's a difficult question to answer in theory because it really depends so much on circumstances. Where a rig is located, what kind of condition the rig is in, what kind of prospects it has. It's really an impossible question to answer theoretically other than to say; practically, we don't plan to spend a whole lot of money keeping the rig warm stacked that doesn't have potential for work in the near-term.

Geoff Kieburtz - Weeden & Co

Do you feel like trading off, you can tradeoff day rates for utilization or couple of the comments made during the prepared comments seemed to indicate you don't really feel there's a lot of elasticity to demand based on day rate, did I understand that correctly?

Randall Stilley

In the international markets Geoff, I think the thing we see is there is a lack of prospects. So, I think you could trade day rate down and it's not going to help you get a job. So, I think in this market, it might be that we're in a little bit different situation like you've had in the past, where you can drop day rate a little bit in return for term. I think in '09, clients just will probably not drill because of the commodity prices.

Geoff Kieburtz - Weeden & Co

Okay, great. Thank you.

Operator

And we'll take our next question from Mike Urban with Deutsche Bank.

Michael Urban - Deutsche Bank

Thanks. Good morning. Louis, you said thatI guess you're effectively out of the asset acquisition market from a Pride standpoint. But, I guess, this is guess probably more a question for Randy. Would the Spinco or Seahawk be potentially in the market for some of the jackup asset be out there and then is that one of the decisions that will impact how much debt you do or do not put on the Spinco balance sheet?

Randall Stilley

I will start first. I didn't hear the first part of your comment but I think the question was, would Spinco be in position to do further acquisitions of other jackups, and it will be part of their business strategy to further consolidate the low spec asset jackup like in the Gulf of Mexico, and we will be considering that as we put a cap restructure for Spinco.

Michael Urban - Deutsche Bank

Okay. I think I have a bad connection here, so I'll leave it at that, thank you.

Operator

And will take our next question from Robin Shoemaker with Citigroup.

Robin Shoemaker - Citigroup

Thank you. I also had a question for Randy, when you mention the prospect of taking some slot in cantilever mat-jackup to Mexico, I assume later this year; are you anticipating a tender for that kind of rig, or something that would be done outside of a tendering process?

Randall Stilley

It could be either, but I think it's likely that we'll see at least one or two tenders for mat-supported rigs later in the year. Pemex has a number of programs on the schedule currently for some sub-sea work that would require a mat rig. And so, that'd be a good application for that and it's likely that. And its likely later in the year we'll see some tenders that are actually renewals for the existing fleet that are there as well.

Robin Shoemaker - Citigroup

Okay, and then I guess my other question was for Kevin and the comment that you're seeing jackup's being bid at 50% of peak. Now am I correct in saying that the peak for this type of international 300, 354 foot jackup was in the 160 to 180 kind of range?

Kevin Robert

Yeah I was actually looking back in July of '07 at the standard 300 floater kind of in the Middle East and that range was like in 180 to 190 and that same type of rig will now see in, anywhere from mid-80's to 105 type numbers.

Robin Shoemaker - Citigroup

Okay, alright thank you.

Operator

And we'll take our next question from Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

Hey good morning guys. Randy wanted to ask you a couple of quick questions; one is how much of a revolver do you think you'll need in terms of servicing working capital needs in order to establish the company. And have you been in contact with banks and can you give us an update on how that process is going?

Randall Stilley

Yeah, we haven't determined the exactual size of the revolver yet because we are still looking at our capital structure. But we have been in contact with a number of banks over the past 30 to 45 days. And we feel fairly confident that that we'll be able to put a revolver in place that will satisfy our needs.

Arun Jayaram - Credit Suisse

Okay, fair enough. Second question, I know its tough Randy but you are doing some things to reduce cost in terms of cold stacking rigs. Could you give us a sense of what you think on a full year basis for '09, the EBITDA range could be for Spinco?

Randall Stilley

Not at this time Arun. I think we'll try to provide a little more guidance on that later on as we're close to a spinoff. But at this time there's just not enough visibility on the business to really have a clue to that.

Arun Jayaram - Credit Suisse

Okay, fair enough guys. Thanks.

Operator

And will take our next question from Ian Macpherson with Simmons & Company.

Ian Macpherson - Simmons & Company

Hi, good afternoon. I guess question for the Kevin or whomever, on the PS4. Could you characterize, how many other rigs you think you typically competing with the opportunities that you are pursuing, and do you have any visibility into the bidding behavior of the other guys out there if it has moved or changed or gotten more competitive over the past few months.

Randall Stilley

Kevin?

Kevin Robert

I would say the, well there's two bidding behaviors, one is from competitors and one is from clients. I think our addressed clients are not moving as fast but they still have prospects, they're still talking to operators and owners of rigs like this and they actually prefer established operators. So, in terms of the competitors that I feel like we have to deal with is the other established deepwater drillers.

I really don't feel that very many clients are seriously considering the rigs from company that don't have any drilling history or especially any deepwater history. So, there's not that many rigs that I feel like I am truly competing with.

Ian Macpherson - Simmons & Company

Okay. I am might have missed in the opening remarks, did you talk about the recent enquiries by ONGC and how you might fit against that possible opportunity?

Randall Stilley

Yeah, ONGC has got a tender out, they're looking for a 12,000 foot 10,000 foot rig. PS4 is one of the few rigs that exist, that can even think about drilling in 12,000 feet. So, we'll definitely compete on that one. And then Petrobras is out there with the market enquiry and they did not have any timeframe on when they would look at rigs. So, I think they are going to pick some rigs up, but I don't know how many.

Ian Macpherson - Simmons & Company

Okay. Can you specify more directly how many rigs you think are competitive with the ONGC 12,000 foot? Is it three, or is it five?

Randall Stilley

There were about 12 companies 12, 13 that bought the tender. You purchase the tender documents.

Ian Macpherson - Simmons & Company

Right.

Randall Stilley

And then there's a pre-qualification exercise that you go through. That's a few meetings with ONGC. And then they actually ask you to officially bid. We know that we'll be asked. I don't know how many other companies will be asked because certainly ONGC has some requirements for previous experience that they may adhere to.

Ian Macpherson - Simmons & Company

Okay, thanks.

Operator

And we'll take our next question from Oblay Hak, Willard Carnegie.

Unidentified Analyst

Yes. Good morning, guys. I just wanted to ask if you could give a little color on, you mentioned the South Seas earlier. What kind of discounted rates we're going to see in the midwater market? So, what are people bidding?

Randall Stilley

There is no visible bidding right now because the tendering activity is quite. Two comments on the midwater markets. Even though these rigs are mobile, you cannot really take a rig and stack it anywhere except the U.S. Gulf or the North Sea. And I think the pricing discipline in the North Sea will make it unlikely that we see rigs migrating out of the North Sea unless they are pursuing a very long-term contract.

So when you look at the bid pricing, I think it's going to be a regional exercise, where you look at, let's say there is a job in Southeast Asia, you look at their job and look at whose close by, look at your mobilization and that's going to drive your bid rate. The only thing that I feel right now is most likely from current levels, bid rates will be lower than what they have been. And that's really all I say right now.

Unidentified Analyst

Also second question in terms of M&A in the floater, what's your strategy on that?

Louis Raspino

Well, we are aware of the every opportunity out there and I'd say that given the extreme good bid at spread I think that exists in the marketplace are now in the state or the capital markets and from my perspective, the lack of need to do something just for the sake of growth, I don't anything out there that is of interest to us. And I don't see anything out there that really appears attractive to many other people right now.

Unidentified Analyst

Okay, thank you.

Operator

(Operator Instructions). And we'll take our next question from Truls Olsen with Fearnley Fonds.

Truls Olsen - Fearnley Fonds

Thank you. A couple of questions; starting off with the CapEx on your new build fleet, you provided details for 2009. Could you provide sort of what's the remaining CapEx in total 2010 and 11 as well i.e.,?

Kevin Robert

Yeah, CapEx in total Truls we're expecting in 2009, about $1.1 billion, a little less than 1.1 billion. About 760 million of that is related to our new builds. In '10, we're expecting about a $890 million of CapEx, 765 of that is related to new builds, and then in '11, we're expecting somewhere in the 700 to 725, $100 million in CapEx; 600 related to new builds.

Truls Olsen - Fearnley Fonds

Okay, thank you. And in your prepared remarks, you mentioned a comment regarding public activity on the deepwater fleet in 2009, as operators are juggling, there, you said were drilling plans that we that you budgeted (ph). And I guess, given turns duration numbers the declining activities from the operators side that's escalating to 2010. How will this likely impact the deepwater fleet and day rate potential as you see it today?

Kevin Robert

Actually, my comment was referring to the midwater market world, that's where we are seeing more of this sub-let activity.

Truls Olsen - Fearnley Fonds

Sure, but I mean in the press release you're stating about potential of sub-let activity on the deepwater fleets.

Kevin Robert

Yeah, there's some discussions among clients that would like to manage their 2009 capital budget and try to find a reduction and one of the easiest places is to drill fewer wells. So, that's where I think some of that activity is coming from. However we have not seeing anybody actually agree to a sub-let yet and certainly we don't know the day rate. We would not expect the day rates to be any less than the face value of the contract. And really I think where you are going to see that might be in the lower specification deepwater rigs, even some of the moored units is probably the most likely place for that to happen.

Its impact on the future right now I am not concerned because such a large percentage of the deepwater fleet is under contract already for '09 and '10. But you could see these lower spec deepwater rigs work down into the mid-water though, I think you could see that.

Truls Olsen - Fearnley Fonds

But I mean on the deepwater side and a lot of these longer term contracts are based on certain prospects and developments and they are now likely being somewhat delayed. I mean this should lead to some higher sub-letting activity as the enable (ph) fleet --as well as come into these markets.

Kevin Robert

I don't think we've seen any delays announced or contemplated on development programs because of the long-term budgeting nature, the activity that we might see as on some short-term exploration projects. But most likely not on development projects.

Truls Olsen - Fearnley Fonds

Okay. Just sneak in a final question on the revolver $300 million credit facility, I mean is this a replacement for the $500 million which expires December, or what's happened to that $500 million in facility?

Kevin Robert

Yeah, it is a replacement for the $500 million facility that expired; I think it was beginning of July.

Truls Olsen - Fearnley Fonds

Okay, so you are looking for some additional facility as well or...?

Kevin Robert

Well, I mean I think that we're comfortable with our position right now in terms of capital structure. We did build in as I said in my prepared comments some flexibility into that facility and so, when the banking markets return to normal here we may look at trying to expand, just that facility just to give us some dry powder if you will, we're still in a market downturn and asset acquisitions become the theme.

Truls Olsen - Fearnley Fonds

Okay, thank you.

Operator

And we'll take our next question from Collin Gerry with Raymond James.

Collin Gerry - Raymond James

Hey good morning, most of the mine have been answered. Did you all give full year '09 cost guidance, I think I might've missed that?

Kevin Robert

No. We haven't given full year '09 cost guidance. But what I did try and do was give a general feeling of where we expect cost to be going. I think that the lower activity levels in the industry we can expect the cost increases we've seen over the last few years to begin to moderate. Now, there is fair amount of uncertainty is to how quickly that happens. You've got a number of new builds entering the market that will continue to put pressure on labor to the extent that those new builds are able to find contracts.

And, in addition of the number the equipment suppliers have already built a fair amount of backlog where depending on the length of this downturn they may not feel very compelled today to begin reducing their pricing. But as longer the softness in the industry lasts obliviously that'll change the dynamics.

Collin Gerry - Raymond James

Okay. Just getting into that a little bit more, I guess I'm thinking on core inflation in the past we're looking at 10% to 15% over the last couple of years. Just listening to other conference call it seems to me like currency is going to play a big factor. And so I am just thinking on rigs outside of Gulf of Mexico or other areas where you might be stacking rigs just on a core inflation basis, where -- percentage terms do you think where cost could be going?

Louis Raspino

I think that what we've seen over the last couple of quarters and generally what we're expecting are costs to be relatively flat from here for the remainder of the year. And obviously there's as I said there's a fair amount of uncertainty in that we know for the first quarter they'll be relatively flat.

In terms of FX impact, we've seen a little bit of that primarily in Brazil, related to some of our local expenditures there. But it's not a large component of our, frankly of our operating results.

Collin Gerry - Raymond James

Okay. That's helpful thanks guys.

Operator

And we take our next question from Mike Drickamer with Morgan Keegan.

Michael Drickamer - Morgan Keegan & Co.

Louis, did I understand you correctly earlier when you commented that perhaps the conditions, weakening conditions in U.S. Gulf, mat for jackup business will not hinder the spin off?

Louis Raspino

I said, we do not believe that the current market conditions would hinder our ability to do the spinoff.

Michael Drickamer - Morgan Keegan & Co.

Okay. And, then it sounded like you weren't expecting much from the way of a delayed from say the SEC or the IRS. At this point is it just logistics on your end as fare as getting all the paperwork done, that's not effecting in timing of the spinoff?

Louis Raspino

Well, I mean we have to make sure the SEC, and the IRS are happy. Other than that we think it's all in our execution.

Michael Drickamer - Morgan Keegan & Co.

Okay. Thanks for clearing that up, thank you.

Louis Raspino

Thank you.

Operator

And at this time we have no more questions.

Jeffrey Chastain

Okay thank you Tina and thank you everyone for joining the call. I'll remind you that the first quarter '09 conference call is scheduled for April 30th. Thank you and we'll talk you again, good day.

Operator

This concludes today's conference. We thank you for your participation. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!

Comments

[Figures:]

I am sooooooo glad Pride can save $30 million dollars by cuttings it's workforce. However, my husband is one that is going to be cut. He will have no job, no money to pay bills, etc. Thanks to Pride, I will quit my job because we can't afford child care at this time. I am disgusted with the economy and with Pride as well. Pride should have at least considered placing these men elsewhere. Here's to another WONDERFUL company all about MONEY, and not it's hard working people who are away from families for a number of days working for YOU!!!! As I am typing this my husband in on your rig being tugged to stack....I see you still need their services to get your rig where it needs to be...then Sunday they will be released to leave home, with no job. My husband is a dedicated employee and works his hands to the bone, again..FOR YOU!!! I hope your pockets are filled with money so you can feed your family at night!!!!!!

Feb 20 02:15 PM