Pride not proud of performance

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

Ray Tyson

Petroleum News Houston Correspondent

Investors are most unhappy with major drilling contractor Pride International, which is suffering from a severe and prolonged financial hangover related to the problem-plagued construction of four deepwater platform rigs for clients BP and ExxonMobil.

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.”