Pride not proud of performance

Big contract driller’s stock plunges 14 percent on charges, missed profit

Ray Tyson

Petroleum News Houston Correspondent

On Jan. 11. 1999, when the price of oil was at a depressing $9 a barrel, Roger Herrera predicted world oil prices would rise significantly within six months.

Skeptics roared.

But he was right. And he has been right ever since.

The long-time Alaska oil and gas consultant doesn’t have any special connections or new sources. He reads the same newspapers and financial reports that anyone on the United States has access to.

His secret?

“Dollops of common sense,” Herrera told PNA July 17. “You don’t have to be unusually clever to assess the world situation in a logical fashion.”

High oil prices are here to stay, he said.

“We might see short-term, small drops, but the trend is upward. ... “I expect we’ll see $40 oil in four or five years.”

What about Saudi Arabia’s intention to drop another 500,000 barrels per day on the market?

“I still have to suspect that whatever OPEC does — and its members have reverted back to their oil cheating ways, producing more oil than they said they pledged to — and whatever OPEC says has an immediate impact on the price of oil whether or not it has an actual impact on supply and demand,” Herrera replied.

“If Saudi Arabia dumps another 500,000 barrels on the market, I suspect there will be an instant psychological adjustment and the price of oil will ... temporarily .. go down. But the impact will be psychological. It won’t have a real supply and demand impact. ... The supply and demand will stay exactly the same as it was before the announcement. ...

“Five hundred thousand barrels is a minuscule increase when the world is consuming something like 74 million barrels per day. To say 500,000 barrels will radically impact the price of oil is not realistic,” Herrera said.

Why does he think world oil prices will “slowly and sedately” increase in the future?

“Worldwide demand is much higher than it was a year ago. It continues to steadily increase. ... Japan and a number of other countries are coming out of recessions, so demand should go up even more,” Herrera replied.

Another factor, he said, is that in the past, periods of high oil prices have resulted in a “huge effort on the part of western oil companies to find more oil. That reaction has not occurred this time around. ...

“While there is no doubt that Schlumberger, Halliburton and other service companies have been experiencing a bit of a boom, the oil companies have not gone gang-busters on exploration this time.”

So how will the world economy react to $40 oil?

“At some stage, demand for oil will level out or go down and other sources of energy will be found,” Herrera said.

“I am totally willing to be wrong (about oil prices continuing to increase to $40 over the next four to five years). ... But if I’m right, it’s good news for Alaska. So, I say, let it happen!”

Pride also came up short on operating profit in the 2003 fourth quarter, due to idle rigs, and continues to struggle with its hefty debt.

Together that was enough to push investors over the edge as Pride’s stock plummeted $2.70 or nearly 14 percent to close at $17.14 per share Feb. 27. Investment bank Merrill Lynch downgraded the stock. Standard and Poor’s put the company on credit watch.

Paul Bragg, Pride’s obviously frustrated chief executive officer, had nowhere to hide during a conference call with industry analysts. “The fourth quarter of 2003 was one of the most challenging ever in the history of our company and produced disappointing results,” he said.

Pride reported a net loss for the 2003 fourth quarter of $38.5 million or 28 cents per share. For the full year 2003, the company registered a net loss of nearly $24 million, preceded by an $8.34 million net loss for full-year 2002.

“We share your disappointment for unacceptable results in Q4 and in 2003, particularly for losses from the four deepwater construction projects,” Bragg told analysts. “The financial outcome ... has been truly awful.”

Rig construction cause of $34 million loss

“In our opinion, these projects have been extremely poorly managed,” Merrill Lynch said in a report to investors. “We believe that additional losses could be reported.”

The construction debacle involves two platform rigs for BP’s Mad Dog and Holstein fields in the Gulf of Mexico and two platform rigs for ExxonMobil’s Kizomba A and Kizomba B fields offshore Angola. Pride management actually warned in July 2003 of escalating costs associated with an overseas shipyard, which according to the company was the source of its first and biggest headache.

When the unidentified shipyard ran into financial difficulties before the first two rigs were completed, Pride said it was forced to lower the scope of work on the first rig and then terminate the contract, resulting in “substantial unplanned costs” transferring the work to another shipyard.

“The aggregate costs paid to the initial shipyard and committed to the second shipyard, as well as costs to transfer the rig and components to the second shipyard, have greatly exceeded our budgeted expenditures for the project,” Pride said.

Pride said it now is using shipyards in the Asia Pacific region for the third and fourth deepwater rig projects. “As a result, the lump sum contracts and anticipated freight costs for these two projects are higher than originally budgeted,” the company added.

Arbitration proceedings against first shipyard for $10 million

“While we intend to vigorously pursue an equitable solution of these issues with the parties, we have recorded additional cost estimates related to the wrap up of these matters,” Bragg said in the conference call, suggesting that the final bill is still in doubt.

Under terms of its current “lump sum” or fixed-price contracts with BP and ExxonMobil, Pride’s Technical Services Group was responsible for designing, engineering and managing construction of the four platform rigs. The company also is to provide drilling operations management of the rig packages once they have been installed on the platforms.

First rig has been mated with platform

Pride’s operating earnings during the fourth quarter of 2003 of $4.4 million also fell well short of Merrill Lynch’s $16.9 million estimate. The company said that between the third and fourth quarters of last year, income from its international offshore operations decreased significantly. Pride said the Pride South Atlantic was idle until late January of this year and that the Pride Venezuela had a full quarter of idle time. Additionally, the company said it experienced downtime on several semi-submersibles and one tender-assisted rig due to unscheduled repair and maintenance time.

Bragg told analysts that a priority is to pay down the company’s $1.8 billion debt by at least $400 million, but Merrill Lynch said losses from the rig construction program could “further postpone Pride’s plans to deleverage its balance sheet.”

Pride’s troubles have caused the company to reorganize under a new management team consisting of John O’Leary, president and former vice president of marketing; new hire Louis Raspino, vice president and chief financial officer; John Blocker, promoted to senior vice president of operations; and Gregory Looser, promoted to vice president, general counsel and secretary.

“I am confident these four individuals will work well with me as an executive team that will be able to take the company to a higher level,” Bragg said. He said the team already has begun to reorganize its operating divisions in a way that “makes them easier to manage.”

“We believe this will produce better accountability,” Bragg said. “We are already working to identify areas where we can rationalize our cost structure and reduce our expenses.”