Pride Tops, Deepwater Improves - Analyst Blog

Pride International Inc. (PDE) reported better-than-expected third-quarter earnings of 33 cents per share, compared with the Zacks Consensus Estimate of 28 cents. However, the quarter's results dropped considerably from 48 cents reported in the year-earlier period.

The company reported total revenue of $346.2 million, down 10% year over year, but in line with the Zacks Consensus Estimate.

Segmental Performance

Pride's Deepwater revenue increased nearly 13% year over year to $216.2 million.  However, the segment's revenue dropped almost 3% sequentially, mainly due to approximately $30 million unrecognized revenues related to a client dispute on payment for 60 contracted days during inspection of a rig. Deepwater's earnings from continuing operations dropped nearly 7% from the year-ago quarter to $66.9 million.

Average dayrate for the Deepwater fleet was $294,800 in the quarter, compared with $340,800 in the last quarter and $343,200 in the comparable quarter last year. Of the Deepwater fleet, 95% was utilized, compared with 90% in the last quarter and 76% in the year-earlier quarter. As of September 30, 2010, the company had 100% of available rig days in its Deepwater segment under contract for the balance of 2010, 83% for 2011, 67% for 2012 and 55% for 2013.

The Midwater segment reported quarterly revenue of $86.2 million, down about 12% year over year and more than 3% sequentially. The decrease was mainly due to lower utilization levels. Operating earnings were $12.5 million, down sharply from $25.7 million in third quarter 2009, while up marginally from $12.7 million in the last quarter.

Average dayrate in this segment was $269,800, slightly up from $269,700 in the preceding quarter and up 2% from $264,100 in third quarter 2009. Utilization in the quarter decreased to 58% from 61% in the last quarter and 67% in the year-ago quarter. Currently, the company has 81% of available rig days contracted for 2010, 78% for 2011, 35% for 2012 and 14% for 2013.

Revenues from Pride's 7 Independent Leg Jackup rigs came in at $24.7 million during the quarter, down substantially from the year-ago quarter level of $72.8 million, but up 14% sequentially. Operating loss was $0.2 million versus the year-ago profit of $32.6 million and loss of $12.1 million in the previous quarter.

Average dayrate in this segment increased sequentially from $87,000 to $92,400, while dropped from the year-ago level of $123,100. Utilization increased from 39% in the last quarter to 41% in the reported quarter, primarily attributable to a full quarter of service on the Pride Montana. However, utilization dropped significantly on a year-over-year basis.

Liquidity

Capital expenditures totaled $366 million in the reported quarter. The company now expects to incur total capital expenditure of approximately $1.13 billion for 2010 from the previous level of $1.05 billion. Cash balance at the end of the quarter stood at $640 million. At the end of the quarter, debt balance was $1.87 billion, representing a debt-to-capitalization ratio of 29.6%.

Outlook

Deepwater is a compelling growth industry and Pride is a proven leader in this space with its engineering and product management skills. Pride forecasts earnings of 38–43 cents a share for fourth quarter 2010. Although, the Mocondo incident hit hard the offshore drillers of the Gulf of Mexico (GoM) region, management now remains optimistic on a surge in demand. We also expect demand to strengthen further and a gradual pick-up in rates for floating rigs and high-end jackups in the near term.

Like other deepwater players, Pride also felt downward pressure on utilization from newbuild capacity and weakness in the floater market. However, the company is well positioned than most of its peers as it is heavily contracted (including midwater). Additionally, we believe the company's ultra-deepwater newbuild program and capital raising efforts will support long-term growth.

The company resorts to asset purchases or additional new builds for growth. Given the recent increase in deepwater activity, we believe Pride is relatively well poised for strategic moves such as ordering new assets, acquiring assets for sale, or partaking in industry consolidation.

The company holds a Zacks #3 Rank (short-term Hold rating). We also maintain our long-term Neutral recommendation for Pride International.