In the final quarter of 2007, offshore driller Pride International (NYSE: PDE ) nearly doubled its per-share earnings compared to the prior year. Pride is positioned nicely for the deepwater dance, and the firm has reaped the rewards of robust rig rates. That said, when I look more closely at how this operation is being run, I can't say that I feel a swell of pride.
The good news is that Pride keeps on signing sweet contracts for its fleet. Just recently, the firm locked down a five-year commitment from BP (NYSE: BP ) for one of its spec-built drillships. Transocean (NYSE: RIG ) has no taste for ordering newbuilds without a contract in hand, but Pride has thus far been rewarded for taking the plunge. The driller now has just one uncommitted deepwater rig under construction (estimated cost: $680 million), and this one won't hit the water for more than two years.
Also sensible are Pride's sales of noncore assets, such as the tender rigs recently sold to a Norwegian investment group for $213 million. What bothers me is the suboptimal deployment of today's fleet.
In the fourth quarter, overall utilization was 72%. Deepwater and international jackup rigs were generally kept busy, but midwater and domestic jackup rig utilization was abysmal, at 59% and 58%, respectively. There is just a whole lot of upgrade and repair activity going on. A glance at Pride's fleet status report shows 2008 to be shipyard-heavy as well. ENSCO International (NYSE: ESV ) had a lot of shipyard work the past two years, but it still managed utilization north of 90% in each year. Meanwhile, Atwood Oceanics (NYSE: ATW ) has captured tremendous upside with 100% utilization over the past two fiscal years.
Pride's margins are slowly improving, but they're still soggy. The firm's total offshore drilling services EBITDA margin, which excludes noncash charges, clocked in at 53%. That beats both last quarter and the year-ago quarter, so the directionality is there, but there's a big chasm between Pride's margins and those of Noble (NYSE: NE ) or Diamond Offshore (NYSE: DO ) .
It's no wonder that Pride has been a constant object of takeover rumors. It would be a marvel to behold these rigs operating in more capable hands.