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Pride International Inc. (NYSE:PDE)

Q2 2007 Earnings Call

August 2, 2007, 12:00 PM ET

Executives

Jeffrey L. Chastain - VP, IR

Louis A. Raspino - President and CEO

Brian C. Voegele - Sr. VP and CFO

Kevin C. Robert - Sr. VP, Marketing and Business Development

Rodney W. Eads - EVP and COO

Analysts

Michael Urban - Deutsche Bank

Arun Jayaram - Credit Suisse

Collin Gerry - Raymond James

Judson Bailey - Jefferies & Company

Roger Read - Natexis Bleichroeder

Daniel Pickering - Pickering Energy Partners

Robin Shoemaker - Bear Stearns

Ian MacPherson - Simmons & Company International

Michael Farah - Merrill Lynch

Unidentified Analyst

Geoff Kieburtz - Smith Barney Citigroup

Unidentified Analyst

Ole Slorer - Morgan Stanley

Thomas Curran - Wachovia Securities

Presentation

Operator

Please standby. We are about to begin. Good day everyone and welcome to the Second Quarter 2007 Earnings Release Conference Call. Today's call is being recorded.

Now, for opening remarks and introductions, I would like to turn the call over to Jeff Chastain. Please go ahead sir.

Jeffrey L. Chastain - Vice President, Investor Relations

Thank you and good morning. Welcome to this review of second quarter 2007 financial results for Pride International. We appreciate you taking your lunch hour on the East Coast to hear what we have to cover this morning. A copy of the press release covering the financial results along with supporting statements and schedules is posted on the Company's website at www.prideinternational.com. Also, you will find historical financial, segment results, supplemental operating statistics, a schedule of our rigs by type and operating segment and the most recently issued monthly update that was issued last evening August the 1st.

Joining me on this morning's call are the following Executive Officers of Pride International. Louis Raspino, President and Chief Executive Officer; Rodney Eads, Executive Vice President and Chief Operating Officer; Brian Voegele, Senior Vice President and Chief Financial Officer, 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 will remind you once again that during the course of this conference call, certain forward-looking statements maybe 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 within the Safe Harbor provided by Federal Securities Regulations. These statements reflect our current views, but 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 at www.prideinternational.com.

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

That concludes the preliminary details. I will now turn the call over to Louis.

Louis A. Raspino - President and Chief Executive Officer

Thanks Jeff. Q2 was another record for Pride… another record quarter. Earnings per share $0.83 including a gain on sell of assets of $0.05. But even before considering this gain, earnings were up significantly from last quarter’s record earnings of $0.58 and we are well ahead of ahead of expectations. And these results were driven by continued excellent operating performance by almost any measure, including utilization, uptime, cost control, and shipyard performance, combined with continued dayrate improvements from contract rollovers.

Average daily revenues increased by 21% in our deepwater fleet and by 36% in our midwater fleet. These record results we tempered by continued market softness in the U.S. Gulf. However, dayrates in Mexico continue their relative strength, and we are preparing to relocate two more jackups to that market with potentials to more such moves in the future.

Our revenue backlog of almost $6 billion held steady despite burning off our quarter’s revenue. And this measure is poised to grow significantly soon as the Pride Inc. Angola contract is now due to expire in June of next year, allowing us to re-price the rig to market dayrates a full year earlier than previously anticipated. We continue to see exceptionally strong market conditions in both the deepwater and midwater markets worldwide. As strong global demand for energy is fueling the strong commodity prices as well as our customers’ appetite for continued growth in E&P spending.

Visibility of strength in the deepwater market is now extending into the 2010 timeframe, with building contents even beyond that point for the long-term. As part of our strategy to further grow our already significant deepwater presence, we recently committed to the construction of an Ultra-Deepwater Drillship. We also took a step in the consolidation of deepwater capacity by acquiring a second Ultra-Deepwater Drillship in the early stages of construction.

As you know we are already the second largest operator of dynamically positioned deepwater vessels worldwide. And the addition of two new premium ultra-deepwater drilling units to our fleet will further strengthen that position and provide for more critical mass in that market, which is important from many perspectives. Also following the recently announced merger of the two largest drilling contractors, we believe customers will encourage increased competition in the deepwater. Now, given our existing market presence in the deepwater, our excellent operating performance in that sector over the years, the forecast, the long-term strength in that market, and our recent commitments to grow our premium deepwater fleet, were exceptionally well positioned to benefit from these market dynamics. And we are confident we will be provided with attractive opportunities to contract the newest additions to our fleet.

Now, before turning the call over to Brian and Kevin, I would like to briefly address the two questions we are now getting almost daily. First of all, concerning the status of our Latin America Land divestiture. All I can say at this time is we are aggressively proceeding down the dual tracks of pursuing both the sales for cash as well as our possible public market transaction. We are in advanced stages of our private process and we are significantly advancing our preparedness to come to market with a public alternative, including an IPO or a spin-off. This divestiture remains one of our higher strategic priorities.

And secondly, following the recent merger announcement of our two largest competitors, we are constantly getting asked questions about our views on further consolidation in our industry. We have always said that consolidation of this very fragmented industry is necessary from several perspectives. Not the least of which is the exceptional consolidation that has already occurred from both our customers and our vendors.

We believe that to truly be a global drilling company, scale is important from several perspectives. Including the ability to attract, train, develop, and retain a quality experienced worldwide workforce, and what is becoming the significant competitive battleground in our industry that is the warfare of talent. The ability to better attract and retain local nationals in the workforce, we need to know that the scale of a company’s regional presence will allow for continued employment in their region. Not just until the completion of an isolated contract.

The ability to better develop and maintain strong and deep worldwide relationships with the world’s largest IOCs and NOCs, the main customer base for the industry is deepwater fleet. The ability to better negotiate favorable terms with vendors, spend larger amounts of indirect cost over more rigs, decrease the mobilization and de-mobilization costs associated with getting rigs from where they are to where the next customer needs them to be, and the ability to employ more comprehensive and effective material’s management practices, including an appropriate worldwide inventory of critical spares, to ensure rigs remain operational and are not down, waiting on equipment that can only be obtained with extremely long lead times, another critical risk factor for our industry that is becoming more acute with each passing day.

And, of course, scale and diversification provide the obvious benefits of lower volatility of results, lower cost of capital and the ability for more efficient tax structuring. So, in summary, we believe, scale is important to better serve the needs of our clients worldwide, to help ensure the most confident worldwide workforce, and of course, to better ensure attractive returns on investment long-term. And our recent decisions to acquire our partner’s interest in two deepwater joint ventures acquired Ultra-Deepwater Drillship already under construction and construct a second premium ultra-deepwater rig, represents significant steps to increasing our already substantial presence in the deepwater market.

Now, Pride has historically played an active role in industry consolidation. Our recent strategic steps continue this trend. And as we continue transitioning this Company in accordance with our strategic plan to a pure offshore play with an increasing focus on deepwater and other premium assets, we do plan to continue our involvement in the consolidation of this industry.

With that, I will turn the call over to Brian for a review of our quarter’s financial results.

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

Thanks Louis. To start off, I just want to add to a few other things that Louis touched on, highlights for our second quarter.

In our second quarter, we achieved record financial results with earnings per share of $0.83 and adjusted EBITDA of $312 million, which was up 22% sequentially and 60% year-over-year. Extending the outstanding performance of the first quarter, this quarter was also marked by strong operating performance with our fleet of deepwater and midwater floaters, again operating with about 2% downtime, coupled with continued dayrate improvement from contract rollovers, contribution from our floating fleet represented more than 57% of offshore segment operating income, and also exceeded 50% of the consolidated operating income for the first time.

Second quarter EPS of $0.83 a share, which exceeded our prior guidance, included $0.05 from the gain of sale of assets as outlined in our press release. Also contributing to this out performance was higher than expected utilization for the floating fleet, higher bonus revenue earned by deepwater rigs in Brazil, and contractual dayrate escalations on the drillships in Angola. Second quarter consolidated revenues totaled $791 million, an increase of 11% sequentially and 28% year-over-year, while utilization of our offshore fleet remained flat quarter-over-quarter. Full utilization of deepwater fleet and increased dayrates for the Pride South Pacific now operating at $425,000 per day, the Pride South America and Pride South Seas contributed to the increase in second quarter revenue.

Top line operating costs of $444 million increased $25 million or 6% during the quarter. Approximately $17 million of the cost for the quarter relates to our Latin America Land drilling and E&P service segment, $8 million of which is activity related. An additional $6 million of the increase experienced by each segment resulted from finalizing a new industry-wide collective bargaining agreement in Argentina. As has been the case historically, we will seek to recover the increases related to the finalization of this agreement from our customers during future quarters.

In addition, operating cost for our offshore segment grew $13 million higher during the quarter, $7 million of which was attributable to higher mode, de-mode cost, higher reimbursable and higher activity levels. Operating costs for other in-segment include the reduction of $6 million for VAT reimbursements. Excluding the impact for the specific operating cost I just highlighted, total operating cost were about 2.5% higher than in the prior quarter. We expect this trend to continue with total operating cost to be in the range of $435 million to $445 million during the third quarter.

Operating income for the quarter increased $60 million over the first quarter, an improvement of 34%. Contributing to this growth, Q2 operating income for deepwater fleet increased to $77 million, up $24 million from the first quarter. This improvement was driven largely by a full quarter of operations for the Pride South Pacific and its company leading $425,000 a day… dayrate.

In addition, contractual dayrate escalations on a Pride Angola and Pride Africa resulted in improvements in average daily revenue for the deepwater fleet for more than $236,000 per day. Our midwater fleet posted similar impressive results continuing the strong dayrate improvement experienced during the first quarter. Operating income for our midwater fleet increased 40% during the period to $46 million, an increase of $13 million sequentially. Contract rollovers on the Pride South America, Pride South Atlanta and Pride South Seas during the quarter, pushed average daily revenue in this fleet segment to slightly over $203,000 per day, up from the prior quarter level of $150,000 per day.

At the same time, our results for our jackup fleet showed only a slight improvement. Increases in activity in Mexico were almost entirely offset by softness in the U.S. Gulf of Mexico market resulting in only a modest increase in the operating income of our jackup fleet for the second quarter of $82 million, up $4 million or 5% from the first quarter. Revenue for our jackup fleet was essentially flat compared with the first quarter. Even though the Arkansas, Tennessee, and Wisconsin were out of the shipyard and operating in Mexico for the full quarter, the additional contribution of these units was almost entirely offset by out-of-service time on the Louisiana additional idle time and continuing dayrate softness in the U.S. Gulf of Mexico market.

During the quarter, our jackups logged 224 days of shipyard and mobilization time, a decrease of 133 days, from Q1, partially offsetting this decrease. These units also logged a 188 days of idle time between contracts in the U.S. Gulf of Mexico, an increase of 95 days from the prior quarter. Q2 average daily revenue in the U.S. Gulf of Mexico was $84,000 as compared to $92,000 last quarter and $110,000 a year ago. Average daily revenue in Mexico continued to improve as we completed licensee contracts and commenced operations of higher rates. The average rate for Mexico in Q2 was $110,000, up from $96,000 in Q1 and $52,000 last year. Kevin will provide a little more color on the Gulf of Mexico jackup market in a few minutes.

Let me pause for a minute to reflect on a comment that we consistently hear with the financial performance of Pride is heavily tied to the prospects of the shallow water Gulf of Mexico. While this is true that we operate a fleet of massive port of jackups in the U.S. Gulf, this fleet represented only of about 10% of our consolidated Q2 operating income. With approximately 450 days or about 50% of available, Q3 rigs on contracted, we estimate that a $5,000 per day change in dayrates would have an impact of less than $0.01 per share. With this perspective, it is clear to us that the future performance of the Company in not driven by the shallow water U.S. Gulf of Mexico market, but rather the international market and in particular the floating market.

Second quarter operating results for our Latin American Land drilling segment declined $4.4 million or 14% to $27.4 million. Performance for the quarter was negatively impacted by the final resolution of the industry-wide union negotiations. This settlement resulted in an increase in labor costs for the quarter of $4.5 million more than offsetting a 3% increase in rig activity in Columbia and Argentina. As has been the case historically, we will seek to recover these wage increases through reimbursements from our customers over future quarters.

On a go forward basis, the agreement with the unions will be phased in over the next few months, resulting in additional wage increases. As a result of the phasing, we expected to incur an additional $8 million in costs during the third quarter. We also expect to seek recovery of this increase through reimbursements by our customers in future quarters. Second quarter operating income for our E&P services segment increased 21% sequentially to $7.8 million.

The improvement in segment was the result of increased cementing and simulation activity, which more than offset the completion of an integrated services project. This business unit was also negatively impacted by the new labor agreements, which resulted in $1.1 million in additional costs for the second quarter and as expected the result in an increase of $2.3 million of costs for the third quarter.

Just a few brief comments now about our balance sheet current capital commitments. We finished the quarter with $125 million of cash and $1.3 billion of debt, resulting in net debt of about $1.2 billion. No amounts were drawn under our revolving credit facility. Net debt decreased to $119 million during the quarter, resulting in a net debt to total capital ratio of 29%. As you are already aware, during the last few weeks, we committed a construction of one drillship and acquired a second drillship in the early stages of construction. Total projected costs for both the units were approximately $1.4 billion excluding capitalized interest to be paid over the next three years. On these two projects, we have made payments of approximately $210 million to date and expect to spend an additional $110 million during 2007.

During 2008, 2009, and 2010, we expect to spend approximately $370 million, $285 million and $440 million respectively to complete construction. Funding these remaining expenses is expect to be for our future operating cash flow, proceeds from asset sales, and drawing our under revolving credit facility. Other capital expenditures totaled $103 million in the second quarter and $202 million during the first half of the year. For 2007, we expect capital expenditure unrelated to the construction project to total approximately $470 million, which included $70 million for the upgrade of the Pride Mexico for operation in 700 meters of water depth. And finally, we expect earnings per share for the third quarter to be in the range of $0.80 to $0.83 per share.

Now, let me turn the call over to Kevin to talk about the markets.

Kevin C. Robert - Senior Vice President, Marketing and Business Development

Thank you, Brian. This morning, my comments will highlight a couple of significant contracts that occurred since our last earnings call, and then I will discuss our expectations for activity levels in some of the key markets in which we operate.

In deepwater, our client for our drillships decided to exercise both years of their option time of Pride Africa, leaving the Pride Angola available to seek a new contract beginning in mid 2008. We are quite excited about the Angola being able to start a new contract in mid ’08 instead of mid 2009 and we are already in advanced stages of negotiations for our new contract.

In midwater, we successfully concluded negotiations on a new contract with Petrobras for the Pride Mexico semi in Brazil. This five year contract should commence in the second quarter of 2008 after completion of the rigs threshold survey, light enhancement and water depth upgrades. The Pride Mexico contract includes provisions for cost escalation from the date of contract execution and also provides for a bonus opportunity related to rig down time that will allow us to realize the maximum dayrate in the mid $260,000 per day level. This dayrate is leading edge rate for Pentagon rig and an increase of more than 360% over the previous dayrate of $49,000 a day.

Pride South Atlantic also re-priced in the quarter, as she began a contract at a rate in the high $230,000 per day range in Brazil, up from its previous rate of $145,000 per day. By the end of 2007, the South Atlantic will re-price again to a dayrate of over $280,000 per day. In our shallow water business, the Pride Oklahoma was awarded a one year contract with Pemex at a fixed dayrate of about $90,000 per day and the rig is on its way to Mexico from the U.S. Gulf for a mid August startup.

The Pride Mississippi was also imported a one year contract with Pemex at about $98,000 per day. And we should commence that contract in mid September. In addition, we executed two very good contracts for our tender rigs the Alligator and Barracuda. These contracts were for 18 months and two years respectively and dayrates of $105,000 to $110,000 per day not accounting client funded upgrades and mobilization.

Now let me make a few comments regarding our mark-to-market outlook. First, I will start with shallow water. In the shallow water markets we expect to experience continued softness in the U.S. Gulf of Mexico. Demand is tampered in the shallow water Gulf as operators take a conservative approach to possible weather delays during the hurricane season by deferring work until after the hurricane season. Effective utilization is about 83% with mat rig dayrates ranging from the mid $60,000 per dayrange for 250 slot rigs to the mid $70,000 per day rigs for 200 foot mat cantilevers. We do not expect activity levels to increase sufficiently during 2007 to allow an increase in dayrates from these levels.

In Mexico, Pemex is under pressure to reverse their decline in oil production through the stimulation of existing production and the finding and development of new reserves. They also have a goal to decrease their dependence on imports of natural gas. These objectives are driving Pemex to renew its existing fleet of about 34 jackups, and we believe they want to increase their jackup fleet by 30% to 40% over the next 12 months. We expect about half of the incremental jackup demand could be satisfied with mat rigs, so we are hoping to move a couple more of our U.S. Gulf jackups into Mexico. Outside of Gulf of Mexico and U.S. Gulf, we expect jackup demand to exceed supply by up to a dozen rigs over the next year. This level of demand is expected to add rigs to the existing fleet in West Africa, the Middle East and South East Asia. However, clients see the way the new jackup delivery is coming out of the shipyards in the next 12 months, and they are proceeding cautiously fulfilling their requirements.

Turning to the floater markets and starting with midwater. There continues to be steady demand for more semis offshore Brazil, West Africa, the Mediterranean Sea and South East Asia. Petrobras just completed contracting four more semis on five year terms one of which was the Mexico, for drilling in water depths from 1000 to 3000 feet. We expect Petrobras to continue to renew the rigs already in country and possibly look for one or two more midwater semis over the next year.

West Africa supply demand is balanced right now, but we see increased requirements in the Mediterranean Sea that will require rigs to be moved into that market. Our near-term focus in midwater would be on extending the backlog on our second generation semi Pride North Sea and the Pride Venezuela.

Deepwater markets continue to experience very high utilization on the existing deepwater fleet and visibility of the market is well into 2010 and beyond. Rig availability is almost zero for 2008, so operators are focused on securing rig time on deepwater rigs available in 2009 and 2010. As a result, the existing fleet is already close to 80% utilized in both 2009 and 2010 with only 15 Ultra-Deepwater rigs rolling off contract prior to mid 2010. The delivery position of our two drillships is already attracting interest from operators looking for rigs available in 2010. Of the approximate 42 new bill floaters scheduled for delivery prior to mid 2010, 33 are already under contract. We expect the experience of our operations personnel in deepwater dynamically positioned drilling to be a big competitive advantage as we pursue the numerous opportunities that we see for our drill ships.

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

Louis A. Raspino - President and Chief Executive Officer

Thanks Kevin. So, to summarize Q2 was a very strong quarter for Pride. As we continued our trend of excellent operating performance and we continue to see historically long-term contracts roll over to more favorable current market prices. We continue to take asset rationalization and growth steps in accordance with our strategic plan. And we continue to see very strong macro trends and now strong industry trends that align with our growth strategy. All things considered we are very optimistic about our future. Jeff?

Jeffrey L. Chastain - Vice President, Investor Relations

Thank you, Louis. Debbie, while you are assembling the queue for the question-and-answer period, I would like to remind everyone again to honor a one question and one follow-up rule to allow us to address as many questions as possible in the time remaining. Debbie?

Question and Answer

Thank you. The question-and-answer session will be conducted electronically. [Operator Instructions].

We will take our first question from Mike Urban of Deutsche Bank.

Michael Urban - Deutsche Bank

Thanks. Good morning.

Louis A. Raspino - President and Chief Executive Officer

Good morning.

Michael Urban - Deutsche Bank

Louis, you addressed industry consolidation and presumably in light of rig global, its primarily corporate consolidation. What might affect growth overall specific to Pride; obviously you have taken some steps down that path with one new build in one acquisition. Presumably, things go well you exercise an option. Assuming you have those three rigs beyond that, what would you say is your limit or how far do you want to go in excess of that in terms of your ability to finance that to manage it to, to handle all those projects?

Louis A. Raspino - President and Chief Executive Officer

Well Michael, it’s hard to define a limit to that without knowing what opportunities. Obviously, asset opportunities, we are going to have some capital structure limitations, although we could do quickly. I think the merger of the two largest competitors in our field here shows that, huge steps can be taken with huge strategic things that happen at the same time along with it. So, what I am trying to signal here is we are continuing to be active in our pursuit of growth opportunities ever so small and ever so large. We have taken small steps; we have taken medium sized steps. And we will continue to look at all facets of growth. For all the reasons that I gave above why scale is important and why I think it is strategically important for the industry to continue to consolidate.

Michael Urban - Deutsche Bank

So, nothing preordain that would preclude you from doing an additional deal or additional new boat of opportunity over there?

Louis A. Raspino - President and Chief Executive Officer

No, there is nothing that’s preordain that would prevent us from doing that. Obviously a lot of our flexibility depends on what happens with the Latin American divestiture. I mean, if we end up receiving cash for that that provides one level of financial flexibility. If we end up spending it all for example that provides another level of financial flexibility. So, it’s highly contingent upon what happens with our asset rationalization programs.

Michael Urban - Deutsche Bank

Okay, great. Thank you.

Louis A. Raspino - President and Chief Executive Officer

Thank you.

Operator

We have our next question from Arun Jayaram of Credit Suisse.

Arun Jayaram - Credit Suisse

Thanks. Good morning guys. Nice results.

Louis A. Raspino - President and Chief Executive Officer

Good morning. Thank you.

Arun Jayaram - Credit Suisse

Louis, how do you... I was intrigued by your comments on scale. Just wondering how you balance your thoughts on scale with the underlying strategic objectives you have highlighted, which is the focus on deepwater and more premium assets. Just my point is or question would be, are you still looking at some point to divest the U.S., Gulf of Mexico jackup assets or scale more important at this point.

Louis A. Raspino - President and Chief Executive Officer

Well I think scale is important at every point. I have addressed several times in the past our position on the U.S., Gulf of Mexico assets and I guess I will try to restate some of my thoughts on that. We have said now for several years our objective is to become a pure offshore play. And then we would focus our growth on the deep water and other premium markets. Now with these growth goals we would not be acquiring the Gulf of Mexico fleet today, if we didn’t already own it. But that’s not the case, we own it. And it’s currently our highest return on capital assets in our portfolio. It is offshore which is part of our strategic plan and it does provide an excellent training ground for our growing labor pool needs for deepwater assets. And that’s a benefit that should not be under estimated.

Now there are other assets in our portfolio that are getting our strategic attention right now are limited bandwidth for possible rationalization. As we know, Latin America Land E&P services being at the forefront of that. However, we are also looking at opportunities on an opportunistic basis for other non-core assets such as our tender rigs and our platforms. So, in the short-term we plan to hold on to the Gulf of Mexico fleet. That’s all I will say, as time goes on, we will re-evaluate that portion of our portfolio. There are no promises being made one way or the other on that. So, I am saying is, for now they provide an interesting side in our portfolio but given what we sort of or where we would like to focus our growth its something that we will obviously continue to re-evaluate.

Arun Jayaram - Credit Suisse

And that’s consistent, I guess after studying the HERO and TODCO merger documents. It’s clear that both of them at some point in the last 12 months did make offers to you so that’s consistent. My question to Kevin is…

Louis A. Raspino - President and Chief Executive Officer

I don’t know how that’s clear in their offering document but I am not going to comment anything beyond that.

Arun Jayaram - Credit Suisse

Do you think the Gulf line? Kevin could you talk about opportunities with the drillships that comes available in mid 2008 maybe the dayrate range and what kind of opportunities you are looking at?

Kevin C. Robert - Senior Vice President, Marketing and Business Development

Well, the opportunities are there. There is both tenders in the market and off-market discussions with clients going on. Can’t comment on the dayrates because it really depends on the term. There are so many factors so you can't make any general statements there but very optimistic on the opportunities. They look like there are a number of different choices. I don’t think we need to be in a huge rush to take the first thing that comes at us. We need to take the right contract. And so the whole management team focuses on each opportunity. We evaluate it, we look at the term, we look at the operating costs, look at where the... who the client is. So, there is a lot of factors that drive our thinking and what we plan to do with those two rigs.

Arun Jayaram - Credit Suisse

Thanks a lot Kevin.

Operator

We have a question now from Collin Gerry of Raymond James.

Collin Gerry - Raymond James

Thanks good morning. I wanted to ask a couple of quick questions on cost. We have seen… and I apologize if i have missed this earlier but we have seen a number of wide range of guidance from some of your competitors as far as year-over-year cost inflation. What are you all looking for ’07 and into ’08 as far as cost go?

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

’07 the guidance we have given and I think this trend will continue based on what we see so far and how we see the year developing. We have given a 10% year-over-year increase. And I think in the first quarter we were up a little less than 2% and then this quarter about 2.5%. So, I think we are on target to come in around 10% year-over-year.

Collin Gerry - Raymond James

And then similar year-over-year in ’08?

Kevin C. Robert - Senior Vice President, Marketing and Business Development

We haven’t sat down and try and begin to do our ’08 budgeting, yet. I would expect the trend to be higher just given the dynamics in the industry, particularly with respect to labor costs. Louis, highlighted all the dynamics and factors that are affecting the kind of the labor market in this segment.

Collin Gerry - Raymond James

Okay. And I was wondering if you could give us a little bit more color in the Gulf of Mexico versus the Mexican Gulf of Mexico for Pemex. What the difference in operating cost are in some of the jackups between the two different markets?

Kevin C. Robert - Senior Vice President, Marketing and Business Development

I think the operating cost is very similar. You have in some cases some costs that you incur in Mexico that you don’t incur in the U.S. Gulf of Mexico but…Brain, do you have anything?

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

Let me say this, it depends on the contract, but generally I think we run anywhere from $3,000 to $5,000 a day higher. And again, that’s general in terms of the costs and it really does depend on the contract itself. But the costs in Mexico are slightly higher than the U.S. Gulf.

Collin Gerry - Raymond James

Okay. Thanks guys.

Operator

We have a question now from Jud Bailey with Jefferies & Company.

Judson Bailey - Jefferies & Company

Thank you. Good morning. Question on the Angola, our understanding is that Totale is looking for additional deepwater rigs and by them not picking up the option on the Angola, are we assume that rig is not being bid for those jobs. It’s going to go somewhere else. And I guess how should we think about that if they are looking for more rigs and don’t… did not exercise the option given the incremental rig needs.

Unidentified Company Representative

Totale chose to exercise the two years options they had on the Africa and the Angola. They elected to put both of those years on the Africa which freed us Angola a year earlier than expected. I can’t really speak for Totale as to their rational for doing that. Totale continues to have tremendous growth plans in that part of the world, and we hope to continue playing a major role in their growth plans. I don’t know if I would reach any conclusions as to what we’re doing with that rig right now based on what you’ve seen or haven’t seen.

Judson Bailey - Jefferies & Company

Okay. And could you please repeat that the cost escalators that you mentioned on those two drill shifts that you are going to recognize or have recognized?

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

I don’t have the specific numbers, but they are reflected in our contract status report… the actual increases. We ended up about $190,000 a day, up from the mid to low $170,000 a day. But in terms of… the actual escalator and how it’s calculated into percentage I don’t have that with me.

Judson Bailey - Jefferies & Company

Okay. And one last question if I could, Louis. The potential buyers you are talking to on the Latin America division, any concern on $0.01 financing in the current credit environment?

Louis A. Raspino - President and Chief Executive Officer

We watched the current credit environment along with everybody else. I can’t really give you any conclusions on that. It’s obviously something that is of interest to us in this process, but other than that I can’t really speak to what it could or could not mean to this transaction.

Judson Bailey - Jefferies & Company

Okay. Thank you.

Operator

Our next question comes from Roger Read with Natexis Bleichroeder.

Roger Read - Natexis Bleichroeder

Yes, good morning gentlemen.

Louis A. Raspino - President and Chief Executive Officer

Good morning.

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

Good morning, Roger.

Roger Read - Natexis Bleichroeder

Quick question for you, you talked about other assets before that you could potentially dispose of… considered somewhat non-core at least not critical to you going forward. But the tender rigs signed up, rates have really escalated there, does that make that group more likely now to be disposed ever or passed along?

Kevin C. Robert - Senior Vice President, Marketing and Business Development

Well, I don’t know that it makes it more likely than it was before those contract renewals, and we’ve always declared them as non-core assets that we would opportunistically respond to divest our opportunities. I think to the extent that high value contracts might make those assets more desirable to buyers, then obviously, we would see more interest there. But as far as our desire to dispose of those assets, it’s always been included in our status strategy.

Roger Read - Natexis Bleichroeder

Okay. And getting back to, let’s assume that Latin American Land unit stays as it is, your commitment to these two deepwater drillships, what level of debt are you comfortable with on the balance sheet. I mean if you needed to go higher in order to finance the building of those two or say acquire some more rigs. Are you comfortable running up to say 40% to 45% debt to caps. Let’s say X whatever cash is on hand right now, but just strictly on gross basis or do you feel like you need to dispose of Latin American one way or another as well as maybe whatever else there is in terms of non-core assets to keep debt to cap say… had occur close to the current level?

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

Roger, I think for short periods of time, I’m comfortable running up in the 40% to 45% debt to total cap range, but some of that view depends on our view of the market and where we sit at that particular point in time the opportunity presents itself. But today as we said, I think I’m very comfortable with being in that range. The two drillships that we do have under construction based on our projections, we believe that we can clearly fund these out of existing cash flow. It wouldn’t require any asset sales and that would include an asset sale of Latin American Land

Kevin C. Robert - Senior Vice President, Marketing and Business Development

While also maintaining flexible capital structure.

Louis A. Raspino - President and Chief Executive Officer

That’s right.

Operator

We have a question now from Dan Pickering with Pickering Energy.

Daniel Pickering - Pickering Energy Partners

Good morning guys.

Louis A. Raspino - President and Chief Executive Officer

Hey, Dan.

Daniel Pickering - Pickering Energy Partners

Louis, could you talk a little bit about… I mean you’re not going to have two new assets available in 2010. I guess what we’ve seen is this market has developed is that the closer you… you get to being available real time, the higher the dayrates have been. And so, with two assets being delivered at that point in time, if you contracted one, would you hold the other kind of off the market for a chance at higher rates as we approach 2010? Or how are you thinking about kind of the contracting strategy of those couple of available assets?

Louis A. Raspino - President and Chief Executive Officer

Dan, I mean that it really depends on the contract opportunities that are available out there. We will obviously contract both of them today at very attractive contracts, but we are comfortable holding one or two of them for quite sometime. We’re waiting for contract market opportunities to develop. My comments and the comments of all of our competitors and most of our investors seem to be echoing the fact that the entire deepwater market looks like it has some links for quite sometime, well beyond the delivery dates of the rigs that we’re talking about. So, we’re not nervous about holding unto to those rigs. Although, we’re not consciously making the decision that we will hold on to them. It’s just that it depends on what develops.

Daniel Pickering - Pickering Energy Partners

And Kevin, I guess the follow-up there is, what rate structure… the contract structures term wise are available for a 2010 rig right now. And can we do a five year deal? Is the market ready to do that from a customer perspective?

Kevin C. Robert - Senior Vice President, Marketing and Business Development

I see everything from short-term meaning, one well, two well contracts out to five year contracts right now, available to this rig. And we’re seeing opportunities out to 12,000 feet water depth. So, there is really a very, very broad spectrum.

Daniel Pickering - Pickering Energy Partners

Okay. And then I know that when you did the call associated with the purchase of the rig back in early July, you’d indicated at that time that there was an option available from Samson I believe. Can you update us on the status of that option, please?

Kevin C. Robert - Senior Vice President, Marketing and Business Development

We still hold the option. It’s been extended but we still hold it.

Daniel Pickering - Pickering Energy Partners

Okay. So… and remind us that is the same price, same general delivery time option?

Kevin C. Robert - Senior Vice President, Marketing and Business Development

Same price, but the delivery would be later in 2010.

Daniel Pickering - Pickering Energy Partners

Okay. All right. That’s all from me. Thank you.

Operator

Our next question comes from Robin shoemaker of Bear Stearns.

Robin Shoemaker - Bear Stearns

Yes, thanks. I was wondering to follow-up on Kevin. Your comment about the jackup market I believe you were referring to in general where you say… you said something like clients are seeing a wave of new bills coming and it is impacting their decisions or how they contract rigs. I just wondered if you could elaborate on that. I realize it’s kind of a fuzzy issue right now, but you seem to be seeing the impact of it.

Kevin C. Robert - Senior Vice President, Marketing and Business Development

The… in the next 12 months, the availability of new build jackups exiting the yards in South East Asia as clients in Middle East, West Africa, other markets that have a need to increase the rig count, see those rigs being delivered. They are more patient, or they’re a little bit less driven to hurry up and contract a rig. So, they’ll be able… it’s a little bit more of a market that they can shop around a little bit in. Even though, there is numerical shortage of rigs, they can delay their decision and try to drive a little bit better dayrates out of it.

Robin Shoemaker - Bear Stearns

Okay. So, dayrates and I guess turn or would both be potentially impacted?

Kevin C. Robert - Senior Vice President, Marketing and Business Development

Yes.

Robin Shoemaker - Bear Stearns

Okay. Thank you.

Operator

Our next question comes from Ian MacPherson Simmons & Company.

Ian MacPherson - Simmons & Company International

A quick follow-up question if I may on the new drillships and what your strategy or what your… I guess what your decision here would be for exercising that option. What you need in the way of securing contracts and what’s already on your plate or if you were to say extend backlog in other areas, midwater or other existing rigs, would that be sufficient to underwrite the risk of another uncommitted new build?

Louis A. Raspino - President and Chief Executive Officer

At the present time that’s not in the forefront of our thinking, as time goes on options become more and more valuable and as the market develops we will step back and revaluate. We are not at the present time considering, exercising that option on the speculative basis, but I will repeat that is as of the present time.

Ian MacPherson - Simmons & Company International

Okay. Did you say when that option expiries? I am sorry if I miss that.

Louis A. Raspino - President and Chief Executive Officer

One month from now.

Ian MacPherson - Simmons & Company International

Okay. Thank you.

Operator

Our next question comes from Michael Farah, Merrill Lynch.

Michael Farah - Merrill Lynch

Good morning guys or afternoon. On Mexico I have been impressed that you guys have been able to get positive spread on rate that’s you get in Gulf of Mexico for the mat jackups. And obviously there aren’t lot of options for those mat jackups outside of the U.S. and Mexico. I guess I was hoping you guys could help me understand why exactly Pemex has been such a premium to the U.S. Gulf when… often that actually just capturing idle units?

Louis A. Raspino - President and Chief Executive Officer

Well that we got very strong presence in that market. We have largest contractor in that market. Pemex really much appreciates our operating capability. We have a very good understanding of what their needs are, going to be in the future. At the same time without a doubt Pemex watches what happens up in the north and they would desire if they could to have the dayrates that they see in the U.S. Gulf of Mexico. So, it’s the right rig at the right time, not every rig in the U.S. Gulf of Mexico can go down and meet Pemex’s specifications. So, it takes a lot of work and it’s not easy, but so far we have been able to do that and I would expect we will be able to continue to gain that differential.

Michael Farah - Merrill Lynch

Okay. Great. That’s helpful. And also I wanted to go back to asking about the timing of committing to the new build float around spec, Louis if having a contract wasn’t requirement for green lighting new construction, why did we wait until now to do so, why wasn’t it may be done a year ago. Do you have more confidence now in the deepwater market than you did 12 months ago, or was it a rig design issue?

Louis A. Raspino - President and Chief Executive Officer

I think it’s a combination of lot issues, as I mentioned now our backlog is approaching $6 billion, which I think is close to $4 billion increase over what it was just over a year ago. I think that the market is continuing to look like it has longer term rigs. And I think quite frankly we have made a lot of progress in reducing the risk profile of the company in order to get our existing lower specification assets on contract and allow us to increase risks other way… in other places of our portfolio.

But the genesis of the new build announcement really came from the fact that we had positioned the shipyard slide in order to be responsive to an ongoing tender for our customer, and it become competitively necessary for us to grab and take that slide in the shipyard. As time goes on the whole world is beginning to see that it is close to impossible unless you are one of the largest players in this industry is close to impossible to match up a shipyard slide with the customer requirement, with topside availability all at the right time, at the right place, at the right price on the right terms and conditions.

And so we concluded that even though we had positioned the shipyard slide to be responsive to an ongoing tender and that we were trying to be as competitive as possible with. We concluded at the end of the day that which all the reasons that I have stated in my comments earlier and for all the reasons I have given here we concluded it was in the company’s best interest to continue with that shipyard slide.

Michael Farah - Merrill Lynch

Okay. And then one last question on the Latin American segment. You guys post another pretty impressive increase in dayrates there and also the count looks like in the last status report went up. How much more pricing power do you see there going forward and as most of it just going to be recovery of cost increases?

Louis A. Raspino - President and Chief Executive Officer

I think we are going to pursue recovery of cost increases as we have in prior years, but I think that that market continues to be a very strong market, the long-term trends are quite favorable. The needs of our customers in order to replace the declining production, the needs of government to become self-sufficient from an energy perspective and the need for higher currency. The macro trends are quite positive and very bullish there. There are some short term disruptions in that market, especially perceiving an election in Argentina. But we continue to be extremely bullish of that market long-term. That’s all I can really say right now about pricing potential in future years in that market and I think we will continue to evaluate opportunities to do that. Some of the pricing that have come from increasing labor cost as we talked about and we will pursue all opportunities to that.

Michael Farah - Merrill Lynch

Okay. But you would expect the operating margin to sort of go back to first question levels and potentially beyond that?

Louis A. Raspino - President and Chief Executive Officer

I think a lot of that… it depends on the timing of reimbursements for these latest labor increases. I mean that would be our expectation today, but again once these things have been agree to typically take a period time to go up and discuss and work with your client through the contractual provisions in terms of how much of this can pass back. It’s been a very high percentage probably over the course of the next couple of quarter we will see the impact of that. So you may actually see margins little higher just because of the retroactive recoveries.

Michael Farah - Merrill Lynch

Okay. Great. Thanks a lot.

Operator

Our next question comes from Knute Nelson with Dragon Funds [ph].

Unidentified Analyst

Hi. I got a couple of questions actually, on the financing side you said you were comfortable with the debt-to-equity level of 40% to 45%. What have you got in commitment, have far can you go… you got $1290 million in net debt for the second quarter. What’s your line, how far can you go in the short-term period? And the second question relate approximately to Pride Mexico. And you said that's going to come on the contract in the second quarter on this currently on yard. If that’s going to stay on the yard until it go to contractor, that’s seems to be a very long time, yard time? And third question goes on the deepwater contracts. When you announced the first new building on the 6th of June… July, sorry. You said that you were in talks with the party regarding contract on that rig. Are you still in talk with the same party or have those talks lapsed? Thank you.

Louis A. Raspino - President and Chief Executive Officer

I can’t take those in order. First was a question… I believe about short term debt capacity.

Unidentified Analyst

Yes. That’s right.

Louis A. Raspino - President and Chief Executive Officer

Ron?

Rodney W. Eads - Executive Vice President and Chief Operating Officer

I guess, how I would respond to that and I think what your question was, how much debt can put on the balance sheet. I think what we would try to indicate here is that we are comfortable with 40% to 45% debt to total cap number, so we little bit hesitant given absolute number because that 40% to 45% is going to move overtime. A year from now that may imply higher debt levels just based on what the financial position of the company is and the amount of cash flow and earnings we generated.

Unidentified Analyst

Okay. That wasn’t really the question. Question was what kind of lines and capacity can you go to with your current cash flow and your current commitments?

Rodney W. Eads - Executive Vice President and Chief Operating Officer

You mean our un-drawn revolving credit facility is?

Unidentified Analyst

Exactly.

Rodney W. Eads - Executive Vice President and Chief Operating Officer

$500 million.

Unidentified Analyst

Sorry.

Rodney W. Eads - Executive Vice President and Chief Operating Officer

Currentlym we have a revolving credit facility in place of $500 million and it’s un-drawn.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from Lucas Stahl.

Louis A. Raspino - President and Chief Executive Officer

Excuse me operator we have two more question. One was on the Pride Mexico.

Operator

I do apologize.

Rodney W. Eads - Executive Vice President and Chief Operating Officer

On the Mexico, the toe time and startup period is about 90 days. So if you back that out that will give you the approximate. Yes, about March when you leave the yard, that’s a pretty major project we are doing in Mexico, so it takes that much time. On our ongoing tenders and things that we are involved in, concerning our new bill, I really can’t comment on those at this time.

Unidentified Analyst

Okay. Can I make a question on the financing please. Have considered doing a share buyback or unless the shareholders do a share buyback. It seems to be you one of the very few oil service companies in the world trading belong that Aspitalia [ph].

Louis A. Raspino - President and Chief Executive Officer

Of course we consider that all time. Of course unlike most of our competitors we are starting at a higher debt level relative to our capital structure. The most of our competitor have come from a much different background and we have historically used leverage over the last couple of years more than our competitors. So we don’t have the beginning capital structure that they were just starting with and also we have had longer term lower price legacy contracts that are just beginning to rollover into what is now generating higher cash flow. Always on our horizon is the most efficient and best use of capital. The first call on capital and these companies to do what all companies are in existence do and that is invest at higher than cost to capital rate of return.

That being said to the extent there is excess capital coming into company beyond the opportunities to do that, beyond the opportunities to strategically position the or needs to the maximize return on capital for all of its investments. We of course consider and will consider in the future our return on capital through share repurchases, through dividends etcetera.

I repeat that we have several very large non-core assets in our portfolio Latin American land, ET services business and their tenders and etcetera. And without knowing right now whether those are going to turn into cash or turn into some type of a distribution. To shareholders it’s hard to sit here today and make incremental decisions beyond and until we get some more clarity with those transactions that are going to do to our capital structure.

Unidentified Analyst

Okay. Thank you very much.

Louis A. Raspino - President and Chief Executive Officer

Okay.

Operator

And now we will take a question from Geoff Kieburtz, Citigroup.

Geoff Kieburtz - Smith Barney Citigroup

Good morning. Two kind of strategy related questions. I guess first, Louis when you go through the lists of benefits of consolidation, it’s fairly persuasive and when I think about them, several of them would seem to be advantageous that perhaps even grow over time. Do you feel a sense of urgency in regards to consolidation in Pride’s participation and consolidation in the industry?

Louis A. Raspino - President and Chief Executive Officer

Yes. I don’t feel any sense of urgency, I think deliberate, well considered steps are always better than urgent reactive steps. That’s all I am trying to communicate, which is very consistent with what I communicated since I have been in this position. As I don’t think this industry is an industry that needs to consolidate in order to maximize its ability to give proper returns to shareholders.

We all know that this industry up until the last couple of years has been horrible. We are delivering return on capital with shareholders and the structure of the industry being kind of caught in the sandwich between a very consolidated customer base and a very consolidated vendor base. What’s the industry, a long term strategic risk, if it doesn’t also consolidate its very fragmented structure. There is not a sense of urgency anymore today than it was 2 years ago when I first made that comment. All of our steps have been designed to move in that direction and they will be continued to be designed to move in that direction.

Geoff Kieburtz - Smith Barney Citigroup

Okay. And then the other question, really just a clarification. In regards to the divestiture, it’s been referred to as a Latin American land. Is the EP services a separate transaction or are you discussing both the IPO or say the public route and the private route for those two together or separately?

Louis A. Raspino - President and Chief Executive Officer

Up until now Geoff we will be considering those two together.

Geoff Kieburtz - Smith Barney Citigroupx

And that continues to be the case today?

Louis A. Raspino - President and Chief Executive Officer

Correct.

Geoff Kieburtz - Smith Barney Citigroup

Thanks.

Louis A. Raspino - President and Chief Executive Officer

I want to step back for a second and answer one of Knute questions that I think we failed to answer. And that was his question about are we still talking to the customer that we said we were talking to. Looking back at… my notes from the conference call, when we announced a deepwater drill ship, we said that our decision to build the unit was initially driven by the need to protect the delivery date necessary to meet a specific customer requirement. And that we have not reached an agreement with that customer.

We continue to talk to several potential customers for not just their drill ship, but for the drill ship that would add since then. But I am not trying to give the impression there are advanced discussions with any customer. We just continue to have discussions with several customers.

Operator

We will take our next question from [inaudible].

Unidentified Analyst

Hi, good morning gentlemen. I just have a very quick question reminding consolidation front [ph]. You have talk about being active in that sense, talking size of the same site. Just wondering, just picking up small players then one would be… and it matters for you or would you need to add more to your fleet? Have a significant…

Louis A. Raspino - President and Chief Executive Officer

Well, I think every little bit helps; quite frankly picking up one or two small players does matter in some ways. It’s a lot easier to do that than bigger steps. And as evidenced by the transaction we just announced acquiring one deepwater rig under construction. Now we are willing to look at smaller steps as well as larger steps. Of course smaller steps are much more important to us given our size then that same smaller steps might be to some of our much larger competitors.

Unidentified Analyst

Okay. Thank you very much.

Operator

Our next question comes from Ole Slorer, Morgan Stanley

Ole Slorer - Morgan Stanley

Yes. Thank you very much. It appears that the speculator that sold you the drill ship most recently made about a $100 million, its all profit. And that you already have speculatively ordered another two drill ships for delivery. So, I wonder if you in the interest of industry consolidation would consider also buying one of those drill ships.

Louis A. Raspino - President and Chief Executive Officer

Well I can’t comment on the economics of speculator that we bought the drill ship from. You have to get that from him. But we look at assets regardless of who holds them. We look at evaluation and quality of the rig and its delivery date etcetera. It’s not that important to us as to where it’s coming from. What’s important to us is to how well it fits into the strategic direction we are trying to take the Company.

Ole Slorer - Morgan Stanley

Okay. Thank you very much.

Louis A. Raspino - President and Chief Executive Officer

Debbie we will take the final question please.

Operator

Our question comes from Thomas Curran [ph], Wachovia.

Thomas Curran - Wachovia Securities

Good morning guys.

Louis A. Raspino - President and Chief Executive Officer

Good morning.

Thomas Curran - Wachovia Securities

You previously indicated that you expect to start 7 to 8 shipyard projects in 2008. I was hoping you could provide an update on that with a breakdown between floaters and jackups and then ideally which specific rigs are in the queue?

Louis A. Raspino - President and Chief Executive Officer

Right now we are looking at about; we said 7 to 8 we are still staying with that. We have got is roughly split between the jackups and the semis. Days wise we are looking at probably about 40% to 50% less days in ’08 that we plan to complete in ‘07. And just to remind we are taking ’07 will be right under 1100 days… shipyard.

Thomas Curran - Wachovia Securities

Wouldn’t it be closer to 200 with the addition of the Barracuda? I am sorry closer 1200 with the addition of Barracuda?

Louis A. Raspino - President and Chief Executive Officer

No, I don’t think so. We can visit with you offline about it, but I don’t think so.

Thomas Curran - Wachovia Securities

Yes that’s fair. Okay. But any visibility on specific rigs on the semi?

Louis A. Raspino - President and Chief Executive Officer

On the semi side we have… we just finish up the Pride Mexico.

Thomas Curran - Wachovia Securities

Right.

Louis A. Raspino - President and Chief Executive Officer

And we got the South Sea. And we got the American beside the South Seas. Actually we got… I don’t have all those right in front of me on the ’08 schedule, but we will put those out.

Thomas Curran - Wachovia Securities

Alright Rodney and we can follow up offline. Thanks a lot guys.

Louis A. Raspino - President and Chief Executive Officer

Okay. Debbie, thank you and thank to you everyone for participating today. We appreciate you visiting with us here on a little bit odd time for us, but we will speak again as we cover our third quarter results. But that’s scheduled for November the 1. Thank you and good day.

Operator

And that concludes today’s conference. We thank you for your participation. Have a good day.

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Source: Pride International Q2 2007 Earnings Call Transcript
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