Pride International, Inc. Q3 2009 Earnings Call Transcript

Executives

Jeff Chastain - VP, IR and Communications

Louis Raspino - President and CEO

Brian Voegele - SVP and CFO

Kevin Robert - SVP, Marketing and Business Development

Ron Stilley - CEO, Seahawk Drilling Division

Analysts

Arun Jayaram – Credit Suisse

Scott Burk – Oppenheimer

Monroe Helm – CM Energy Partners

Robin Shoemaker – Citigroup

Ian Macpherson – Simmons & Company

Andres Fitzgerald [ph] – Pareto

Pride International, Inc. (PDE) Q3 2009 Earnings Call Transcript October 29, 2009 2:00 PM ET

Operator

Thank you for waiting and welcome to the third quarter 2009 earnings call -- conference call hosted by Pride International. 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.

Jeff Chastain

Thank you, Robert. Good morning and thank you for joining us for our review of the third quarter financial results for Pride. A copy of the press release covering the financial results along with the supporting statements and schedule is posted on the company's website, as you probably know that's prideinternational.com. Also on our website we posted last evening the latest version of fleet contract status dated October 28th, so that is also there for your download.

Joining me on the call this morning are the following executive officers of Pride. Louis Raspino, President and Chief Executive Officer; Brian Voegele, Senior Vice President and Chief Financial Officer; Ron Toufeeq, Senior Vice President of Operations, Asset Management and Engineering; Kevin Robert, Senior Vice President of Marketing and Business Development; and Len Travis, Vice President and Chief Accounting Officer.

Before I'll begin I will turn the call over to Louis, I'd like to remind you once again that during the course of this 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 this call are written 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.

I'll now turn the call over to Louis.

Louis Raspino

Okay. Thank you, Jeff. Good morning, everyone. Following our normal practice I’ll make some opening and then brief closing comments. Brian's going to give you our financial information. And Kevin will talk about our market segments.

Most importantly in the third quarter we delivered on our commitment to finalize the spin-off of the mat-jackup business. This represents the final major step to position the company with a highly focused floating rig fleet, and with an increasing emphasis on deepwater drilling. And this is evidence by the fact that 77% of our 2009 year-to-date revenue is from our floating rig fleet spin [ph]. And we forecast that by 2012 this will grow to approximately 95% of our revenue coming from our floater operations.

We said early on that we believe the spin-off would result in the some of the parts being greater than the whole, and we see tangible evidence of that now as the value of our long-term strategy is being increasingly recognized by the market.

Since the spin-off our equity performance is leading our peer group as Pride is receiving a more appropriate valuation as a floating rig company within emphasis on deepwater, combined with Seahawk being valued on a standalone basis is the U.S. natural gas pure play. We expect to continue our strong equity performance relative to our peers as investors increasingly understand and value the market leading deepwater growth already wired in to our portfolio in 2011 and 2012.

Now healing [ph] most of that growth will be the addition to our fleet total to four ultra deepwater drillships currently under construction all at Samsung. I am happy to report that all four of these projects continue to be on time and on budget in the shipyard. We’re schedule to take delivery of the Deep Ocean Ascension at the end February and beyond day rate revenue by the end of July.

In this week, the key [ph] was laid on the Deep Ocean Clarion. We anticipate launching that ship out of the dry dock in December taking delivery in late August of next year and being on day rate revenue by the end of January '11. And both of these units are contracted to work of BP in the Gulf of Mexico.

With the transformation of Pride now complete, we’re sharply focused on providing our clients with deepwater solutions through excellent safety, operations and engineering capabilities. Performance excellence and continuous improvement are our standards in all activities, line and staff.

And with that objective in mind, during the quarter we announced the reorganization of our operations functions. Dividing the responsibilities of the formal Chief Operating Officer position and naming Ron Toufeeq who was formally our Senior Vice President of Engineering, as Senior Vice President of Worldwide Operations Asset Management and Engineering, and naming Greg Looser who was formally our Senior Vice President of Legal and Information Technology. He is now Chief Administrative Officer, whose responsibilities will now also include executive leadership of our worldwide safety and supply chain functions.

This reorganization is already driving actions to eliminate layers, improve the efficiencies, reduce cost and improve performance. Most importantly, this new structure will allow for increased executive level focus on our day-to-day operations, asset maintenance and engineering functions as well as executive level focus on the strategically important safety and supply chain functions. These changes play a very important role in ideally position our organization for continued growth.

Turning to industry conditions, with the extreme economic uncertainty that has prevailed throughout this year, we have seen few contracted commitments in the industry for all classes of offshore rigs. However, as average crude prices improved 15% in the third quarter relative to the second, and a current price of approximately $77 is up 125% from this year’s low in March.

We are seeing increased -- customer increase compared to earlier this year, especially for ultra-deepwater rigs. Should oil market and economic fundamental strengthen or even stabilize so that customers can have a higher level of confidence in a sustainable crude price trading range.

We believe even at current oil price should support higher exploration and production spending and greater demand for offshore drilling services. In addition to the oil market fundamentals, customers continue to face many challenges in spending the ever increasing rate of production decline in existing fields, which we expect will support long term demand growth for drilling services. And interestingly, despite the depressed worldwide economy, in 2009 year-to-date E&P companies have announced 37 discoveries in water depths greater than 3000 feet. Now this is more than any other full year in history.

Now (inaudible) do not appear to be in hurry to commit to rigs for their ‘11 programs and beyond, and this adds some uncertainty regarding the near-term rig supply and demand balance. However, the high exploration successes rate bodes well for longer term development drilling in deep and ultra-deep water.

For the third quarter, we reported earnings from continuing operations of $0.45 per diluted share, which was at the top of our previous guidance of $0.39 to $0.45.

Before turning the call over to Brian to review the quarter from a financial perspective, I’ll mention that Q3, and to larger extent Q4, are being impacted by a high number of out-of-service days on some of our highest day rate rigs as we complete the necessary periodic surveys along with significant upgrades in the shipyard.

The overlapping timing of several of these shipyard projects in these two quarters is unfortunate, but such shipyard visits are necessary part of the offshore drilling business. We will soon have the shipyard projects behind us, so we can return the rigs to work while we are also beginning to see next year the impact of our deepwater drill ships start to come online, Brian?

Brian Voegele

Thank you, Louis, and good morning to everyone. Before I begin with my prepared comments, I want to apologize for the lateness with which the press release came out, the earnings release came out this morning a little bit later than we normally would like to get it out. As you might expect with the spinoff of Seahawk and those of you that have been around, I’ll call that audits, it’s a very difficult process to go through in your final accounting.

And, I think our accounting group has done a tremendous job and there was some additional reconciliation that we were going through late into the evening.

In addition, because of the lateness that we finished up, we had a technical difficulty with the wire service. And so, I apologize that you may not have had much time to look at the release. Obviously, Jeff and I are around all day, so if you try and make it through -- way through the release and have additional questions, certainly feel free to call us.

I have planned to make a few brief comments about our financial performance for the quarter and what to expect as we look forward to the fourth quarter. As a result of completing the spinoff of our Mat-Jackup business during the third quarter, financial results for this segment have been reclassified to discontinued operations.

My comments today will focus primarily on the performance of our continuing operations.

Third quarter income from continuing operations totaled $80 million or $0.40 per diluted share on revenues of $386 million. Included in our reported results for the period, our additional costs associated with the restructuring of our global operations and support groups including related severance costs totaling $6.9 million or $0.03 per share after tax, excluding these non-recurring costs, income from continuing operations would have been $0.48 per fully diluted share for the period exceeding our prior guidance of $0.39 to $0.44 per share. Our outperformance was driven primarily by better-than-expected operating results from the Pride Wisconsin which worked under its contract with Pemex 20 days longer than originally forecasted for the period, contributing an incremental $0.02 per share.

The Sea Explorer which operated on its contract in Congo for 21 days longer than expected contributed an additional $0.03 per share. In the rest of our floating fleet, better-than-expected performance by the Pride Angola which operated a 100% utilization. In recognition of incremental deferred revenue from the Pride South Atlantic we are more than offset by the impact of the early completion of the Pride South Pacific contract, additional out-of-service days in the Pride Portland due to our decision to blast and paint the hole and columns while it was in the yard and mechanical downtime in the Pride Mexico, all of which, aggregate resulted in a reduction of $0.03 per share, separate from the performance of our fleet, lower than expected SG&A expense contributed an additional $0.02 per share to our outperformance.

As noted during our last call in July, and as Louis mentioned earlier, plan shipyard activity was a major influence in shaping the quarterly results. Major upgrade projects on three of our eight deep water rigs along with planned maintenance and mobilization on the Sea Explorer as it will move from West Africa to Brazil to begin a multi-year contract resulted in lower revenues and earnings for the period when compared to the second quarter.

These planned projects coupled with unexpected downtime on the Pride Carlos Walter and the idling of the South seas caused the utilization in the deep and mid-water segments to fall to 76% and 67% respectively for the third quarter. This compares to second quarter 2009 utilization of 95% for the deepwater segment and 82% for the midwater segment. As a result, total revenues excluding client reimbursable were $386 million in the third quarter down 12% when compared to the second quarter of 2009.

Just to update the status on each project, first in the deepwater segment. The semisubmersible Pride North America was out of service for 79 days during the quarter undergoing its SPS and a significant upgrade program that includes the installation of the fourth engine and a new pipe racking system along with an overhaul of mooring system and refurbishment of accrual quarters.

Total cost for the shipyard work is expected to be approximately $55 million. Some delays have been experienced with the delivery, equipment and steel replacement. As a result, the rig is currently expected to return to service in mid-November.

The Pride South Pacific was out of service for 33 days during the period after completing its contract earlier than expected. Arriving into shipyard in Cape Town on September 18, the rig began its upgrade and maintenance project that includes among other thing, it's five year SPS and major combination upgrade.

As a result of the earlier start date the project is expected to conclude by mid December 2009 and following mobilization we’ll be ready to commence its one year contract with Noble Energy and (inaudible) near the beginning of 2010.

Finally, the semisubmersible Pride Portland was out of service 31 days in the quarter. Project was completed on October 6th and rig was back on dayrate on October 13th. In our midwater segment, the semisubmersible Sea Explorer was out of service for 41 days in the quarter.

During the third quarter, the rig energy shipyard in Congo on September 1st to complete necessary survey work and contractually required equipment upgrade in advance of commencing its two year contract with OGX in Brazil. The Sea Explores begin its mobilization to Brazil on September 21st arrived on October 16th as expected to commence its contract OGX in the first week of November following customs point clearance and equipment load out.

While on the shipyard in Congo, during its mobilization to Brazil and during the period of customs clearance and equipment load out, the unit was on reduced dayrate of $300,000 a day resulting in approximately $18 million of revenue which were accounting purposes is deferred and amortized over the license [ph] contract.

In addition to the out of service time related to schedule shipyard programs the deepwater semisubmersible Carlos Walter was on zero dayrate for 20 days to re-drill a portion of the well during a period. Furthermore, after working for 58 days during the period the Pride Wisconsin completed its contract with Pemex and it was mobilized back to the U.S. Gulf of Mexico where it was cold stacked. We do not expect the Wisconsin to work for the foreseeable future.

Operating expense, before reimbursable for the third quarter increased 2.6% over the proceeding quarter of the year to $211 million. Third quarter OpEx reflects $6.2 million in severance costs associated with changes design to flatten the organization and reduce regional over head.

Offsetting this increase was $2.5 million more in capitalized and deferred cost during the period, associated with shipyard and mobilization activity then in the second quarter. Excluding the impact of these two specific items operating costs were approximately $2 million higher than in the second quarter. Primarily as a result of increased labor cost associated with the continued ramp up and staffing and training through our new built drillships is scheduled to be delivered in 2010.

SG&A for the third quarter was $30 million compared with pre spend SG&A of $33 million. Included in the third quarter SG&A our severance cost of $600,000 along with an additional $600,000 related to stock based compensation adjustments in conjunction with the distribution of Seahawk equity.

Excluding these items SG&A decline by approximately 13% during the period reflecting reductions made as a result of deposing the mat-jackup segment and an increase focus on reducing overhead costs.

Further streamlining of our shore base support cost continue to be key goal of ours. We began implementation of first phase of this effort which consists primarily of targeted reductions early in the third quarter. We have started the second phase of the project which entails white boarding the organization and while this is a tedious process, we are optimistic that it will result in further efficiency.

Total EBITDA in the quarter was $137 million, down 32% from the second quarter of 2009, due primarily for the high level of shipyard activity in our floating fleet. As Louis noted, despite this activity our floating rig segments still contributed 75% our EBITDA in the third quarter. A level that we expect to continue expanding as we complete our active shipyard schedule in 2009, and commence operations with our new ultra deepwater drillships currently under construction.

Our effective tax rate in the third quarter was 18% squarely in the range of our expectations. We expect our effective tax rate for the fourth quarter to fall in the range of 17% to 20%. Our cash tax rate for the third quarter was 16%.

Cash flows from operations in the third quarter totaled $158 million bringing cash flows from operations for the first nine months of 2009 to $532 million. Capital expenditures in the quarter reached $224 million with expenditures for the nine months ended September 30th totaling $699 million. Approximately $468 million of the capital expenditures for the first nine months of the year related to the construction of our four ultra deep water drill ships.

We expect total capital expenditures in the fourth quarter of 2009 to be approximately $373 million bringing full-year spending to an estimated of $1.2 billion with an outlay of $237 million in the fourth quarter forecasted for our existing new bills. At September 30th, approximately $1.6 billion in capital expenditures remains to complete our four rig construction program.

At the end of the period, cash and cash equivalents totaled $958 million and our $320 million revolving credit facility was undrawn. Total debt was $1.2 billion resulting in a debt-to-total capitalization ratio of 22% well within our target range. We believe that our existing liquidity combined with future cash flow from operations is sufficient to fund our existing construction commitments and our balance sheet provides us with a solid foundation for growing our deep water fleet during this period of softness.

Looking ahead, we expect the fourth quarter to be similarly characterized by shipyard activity on a highest day rate rigs. As I mentioned earlier, it is expected that the Pride North America will return to service in mid-November experiencing about 30 more revenue days and are achieved in the third quarter. Similarly, the Pride Portland, upon completion of its five-year survey is expected to achieve 22 more revenue days during the fourth quarter than it did during the third quarter.

Utilization improvement for the Carlos Walter is also expected to result further revenue improvement for the fourth quarter. However, these improvements are expected to be entirely offset by the impact of the Pride South Pacific which is scheduled to be in the shipyard for the entire fourth quarter or have about 60 less revenue days than achieved during the third quarter.

Further contributing the revenue reduction, the Pride South Seas, Pride Wisconsin, Pride Tennessee are all expected to be idle for the entire period. And the Pride Pennsylvania is expected to be off hire [ph] for 60 days during the period as it mobilizes the shipyard for its periodic survey. As a result of these changes, we expect fourth quarter revenues, excluding reimbursable to decline from third quarter levels by about $70 to $75 million.

Total operating costs are expected to decline by approximately $7 million in the fourth quarter. This decrease is expected to be driven largely by cost related rigs that we expect be idle or cold stacked during the period partially offset by a $5 million increase in costs associated with the hiring and training of crews for the deep ocean ascension, the first of our four new build projects which is scheduled to be delivered in the first quarter of 2010.

With this backdrop, we expect the fourth quarter of 2009 to be in the range of $0.12 to $0.17 per share and represent a trough level of earnings. While the fourth quarter will mark a low point, we also expect 2010 to show considerable improvement as utilization in our deepwater fleet returns to more normal levels with the completion of shipyard projects in the North America and the South Pacific, and as earnings contribution from the deep ocean ascension commences.

Now I’ll turn the call over to Kevin to make some comments on -- we have made in shallow water market segments.

Kevin Robert

Thank you, Brian. We expect the international jackup market to continue to be very soft for 2009 and into 2010, as about a 110 rigs are looking for new contracts in the next six months. The worldwide jackup fleet continues to add capacity, is about 51 new jackups will be delivered over the next 18 months of which 42 have no contract. Day rates for premium jackups operating in non-harsh environments appear to be contracting in the $95 to $115,000 per day range, while rates for standard 300 foot IOCs were mostly in the $75,000 to $95,000 per day range.

In India, ONGC has received nine bids for its tender for 300 foot independent leg jackups for five-year terms. This tender is targeting renewal of three incumbent rigs in India for commencement by May 1, 2010. Although, one of the incumbent rigs is the Pride Pennsylvania, the rig is not available before May due to its need to undergo a special periodic survey, so we do not expect to win this work.

At the end of the current contract for the Pennsylvania, we plan to move it to a yard in the Middle East and bid the rig back to ONGC on our next tender, which we expect end of March, before the end of the year.

Overall, we expect ONGC to hold its jackup cost steady during the next 12 months, -- we would be able to obtain some higher specification rigs at good rates. There is a similar situation developing in the Middle East where Saudi Aramco is examining their jackup requirements for 2010. We expect to see them maintain or even increase their jackup fleet, but do so by acquiring newer higher specification jackups at competitive rates.

In Mexico, Pemex is struggling to obtain funding for their drawing programs. This is preventing them from launching any new tenders, and we now expect them to delay [ph] any new tenders until early 2010. Indications are that they could further reduce their rig count going forward as they may continue to release rigs with terms expiring in 2009 as they have done to the Wisconsin and the Tennessee.

When Pemex’s 2010 budget is approved, they may be able to extend a few incumbent rigs and launch new tenders, but we expect the rig count in 2010 to be lower than in 2009. We are marketing the Tennessee for work in other markets, but Wisconsin is cold stacked.

West Africa continues to have about 15 oil jackups, and opportunities continue to be spotty, but we haven’t been able to find well-to-well work with a good vendor. And we expect to continue working this jackup in the West African spot market.

Deepwater markets which we define as water depths from a 1,000 up to 4,500 feet of water continue to be under near term utilization pressure as only about half of days available for the marketed midwater fleet or contracted from now to the end of 2010. Recent contract awards in the midwater sector have mostly been for short-term work, although, there was a recent award of one year contract for more semi in Brazil. The dayrate was in the mid $200,000 per day range for a deepwater MODU semi that we operate in midwater.

During the quarter, we had couple of new inquires coming to the market for work commencing in late 2010 to early 2011, and although, we expect few more midwater rigs in the North Sea maybe idle, we don’t expect that will migrate out of that market. If they stay put it will keep high expect midwater rigs from competing in other markets. We also believe that there will be some longer-term growth in 2011 and beyond in midwater market for water depths exceeding 200,000 feet. However, this demand is likely to be satisfied by lower spec deepwater rigs working in midwater sectors.

We continue to offer the Pride South Seas and Pride Venezuela on midwater opportunities but at this time we don’t have any commitments for these rigs. The Venezuela is on its way to a yard in the Middle East and the South Seas will stay in West Africa while we look for work.

Deepwater markets which we define as water depths greater than 4,500 feet have been relatively quite as we experienced only one contract commitment and a couple of new inquires for deepwater rigs in the quarter. Bids will also turn in for two deepwater tenders looking for equipment in 2011.

(inaudible) activities are increasing especially in the U.S., Gulf of Mexico as operators continue to try to reduce their 2009 and 2010 drilling expenditures in order to balance their budgets. The willingness of operators to subsidized deepwater rig rate appears to be limited, so we do not expect all that activities to negatively impact dayrates at the preset time.

As we close 2009 and enter in to 2010, we still do not have enough data points from foreign commitments to gauge the pace of activity for 2010. With budget season approaching, we may begin to get some indication of activity levels based on announced 2010 budgets.

As Louis mentioned, to date our industry has had 37 discoveries and water depths greater than 3,000 feet. 21 of those were in water depths greater than 4,500 feet. More importantly, there is a trend to deeper and larger diameter wells which requires high specification equipments such as our new drillships.

There are currently about 15 enquiries or tenders ongoing in deepwater which are up from about 10 over the last quarter. We are responding to these request and tenders with (inaudible) our new build drillship available in 2012 and our existing deepwater fleet.

Let me close with an update on what is happening in Brazil, Petrobras issued tenders this week before last for a large number of new build rigs. Petrobras is looking to add up to 28 rigs to its domestic fleet through these tenders.

One tender for nine rigs was issued directly to Brazilian yards. Petrobras intends to own these rigs and likely offer long-term management contracts with our operation. The second tender for up to 19 rigs was sent to drilling contractors. Responses to the tenders are due in March 2010 and require all the rigs to be built in Brazil.

Petrobras has requested deliveries to begin four years after they award the contracts and they want all the rigs delivered within six years after contract award. This is a very ambitious project with many challenges but confirms that there is a real demand or ultra deepwater rigs operating in Brazil.

We expect their demand to continue to be partially satisfied by existing rigs from the international market. We have received the second tender and are evaluating how we can participate. It is much too early to speculate on the costs of building drillships or semis in Brazil and it may not be economic. But as you know, Petrobras is a very valuable client and we will seek to participate in the tender in a way that will give us an opportunity to profitability increase our business in Brazil and to further build on our relationship with Petrobras.

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

Louis Raspino

Okay. Thank you, Kevin. In closing, with the completion of the spin-off our mat-jackups and the coming addition of the four ultra deepwater drillships start fleet, what I called extreme makeover Pride International was complete. We set the strategy in motion four years ago, resulting in our exit from the rig construction business as well as of divestiture of our 214 land rigs in Latin America along with our Latin American E&C service business, our Eastern Hemisphere land business and our Eastern Hemisphere tender rig business and in the Gulf of Mexico, of course, our platform rigs fleet and our fleet of 20 mat-jackups with the spin-off of Seahawk.

We follow the strategy counter to the trend of many others, who are investing heavily in additional jackup capacity. In all this time period, we’re significantly growing around our core deepwater drilling expense. For the market has proven our strategy to be insightful. We’re very glad with our strategic position today as a proven leader in deepwater operations.

With our strong focus on deepwater, we find ourselves well situated in the significant growth segment of the offshore drilling industry. As exploration and development technological improvements over the last decade have opened up this new geologic frontier providing a growing number of excellent -- exploration prospects with high success rates resulting an increasing rig needs for future development projects. Many of which will need the high-end drilling technology that we’re building into our fleet expansion.

Deepwater is the area NOCs and IOCs are increasing looking to for their impactful discoveries, not only to replace the rapidly declining production but also to grow the reserve base. Customers in this market are well capitalized with long-term prospectus and with the ability and need to drill through commodity price volatility, and also focus not on quarterly results, but on broader, longer term objectives of increasing their natural resource reserve base, energy independents, hard currency reserves and driving their economic and social development, all in any, commodity price environment.

As a leading deepwater driller, this is our playing field. It is true that the deepwater drilling sector, like all sectors in the drilling market, is dealing with short-term rig supply demand challenges, but unlike the other sectors, the deepwater market provides visible, excellent, long-term growth potential.

Going forward, our revenue backlog of $7.2 billion primarily in the deepwater, represents a 125% of our market cap and provides a strong tailwind to what we believe will be industry leading EBITDA growth through 2012. Our asset base, our balance sheet and our organization are all well positioned to pursue further growth opportunities as we continue our journey which we have been calling up until the right.

With that, I will turn the call back over to Jeff.

Jeff Chastain

Great. Thanks, Louis. Robert, that concludes our prepared remarks. We are ready now to begin the question-and-answer period. So while you are assembling the queue, I’ll remind everyone to please follow the one question, one follow-up rule, so we can get ready the Q&A allowing one time to answer when I pass the question.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question will come from Arun Jayaram from Credit Suisse.