Pacific Drilling SA: Still Struggling to Gain Momentum

The longtime promises of Pacific Drilling's  (NYSE: PACD  ) ultra-deepwater drillships continue to get investors nowhere fast. The stock went public at the end of 2011 to quickly jump to the $10 level. Pacific Drilling has gone virtually nowhere over the last couple of years as it builds its fleet. 

Pacific Drilling is focused on providing global ultra-deepwater drilling services to the oil and natural gas industry through the use of high-specification drillships. The company took delivery of its first drilling ship at the end of 2010 and now operates five ships with three more under construction.

With recent statements suggesting a pause in the deepwater segment by Noble (NYSE: NE  ) and strength in the high-specification segment by Seadrill (NYSE: SDRL  ) , Pacific Drilling sits in the middle of the sector divide. The newcomer in the deepwater segment should be set up to benefit from high-specification ships in high demand, but for now it is sitting with a bunch of drillships without guaranteed contracts.

New drillships
Analysts predict Pacific Drilling's revenue will surge 50% in 2014 to more than $1.1 billion. The major factor will be two new rigs with expected delivery during the next couple of quarters. The first ship, Pacific Sharav, already has a solid five-year contract with Chevron in the Gulf of Mexico. The day rate is a substantial $590,000.

The bigger concern is the second ship, Pacific Meltem. It isn't contracted yet and has a delivery date of early third quarter. The company has a third drillship under construction with a delivery date within about a year. While not a huge concern at this point, the pressure will mount if the Meltem doesn't obtain a suitable contract soon.

Source: Pacific Drilling

According to Seadrill, these new, high-spec ships are still in strong demand; yet Pacific Drilling has the Meltem and the Pacific Zonda with delivery dates of early 2015 without contracts. For a relatively small company, two new ships without contracts is a huge concern. On top of that concern, Pacific Drilling appears caught with only three ships currently contracted beyond 2015.

Three ships now sit with contracts ending by early 2015 or with unclaimed add-on options. One saving grace for the company is that the average day rate for these affected ships was only around $500,000. With industry rates soaring to $600,000 or more for the recent ships, it doesn't appear that contract downgrades are a risk.

Struggling efficiency rates
For Pacific Drilling, a new company that only received its first ship three years ago, it isn't too surprising that utilization rates started low and initial day rates were low. Now, though, the company needs to produce something higher than the forecast 92% range for 2014. It closed 2013 with revenue efficiency rates averaging 96%.

In contrast, Seadrill saw rates for the deepwater fleet consistently hit near 94% in the last couple of quarters. On the other hand, Noble struggled to reach these levels due to older rigs. In the fourth quarter, the floater segment only reached rates of 84%. Pacific Drilling expects a new rig to reach 90% efficiency during the first six months, so it is unclear why the older ships aren't shifting the average revenue efficiency rates higher.

Bottom line
Pacific Drilling is another example of a company designed for success but one by which shareholders have not benefited. Whether the stock was overpriced at the time of the IPO or the expectations were too high for a new company in a technically difficult sector, Pacific Drilling shareholders haven't been rewarded for waiting out the volatile time. Unfortunately, at these levels the stock isn't likely to move much until the company gets more long-term deals and proves that it can operate at higher revenue efficiency rates.

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