Pride International (NYSE:PDE) continues its transition to a deep water offshore drilling company, despite the downturn in the energy sector in 2008. However, some questions remain as to whether or not the upcoming spinoff of some of its assets will unlock value.

Pride International is a drilling contractor that operates a fleet of 45 rigs. Twenty-seven of the company's rigs are shallow water jackup rigs, with the balance able to drill at depths of more than 1,000 feet. In addition, Pride International has four ultra deep water drill ships, with the capacity to drill at depths of 12,000 feet, in various stages of construction.

Pride International has the fifth largest fleet among all publicly-traded drilling contractors. Transocean (NYSE:RIG) operates the largest fleet, comprised of 145 rigs, and Noble (NYSE:NE) owns 60 rigs. Ensco International (NYSE:ESV) and Diamond Offshore Drilling (NYSE:DO) operate 52 and 46 rigs, respectively. However, considering only the deep water segment of the market, Pride international moves up to the number two spot, with 16 rigs capable of drilling at depths of greater than 4,500 feet, trailing only Transocean, which operates 44 rigs at the 4,500-foot capacity. Due to the nature of its assets, 86% of Pride's revenues come from international sources.

Spinoff
Pride International plans to separate its jackup rigs from the company in 2009. Twenty rigs will be included in the separation, which then will be spun off to existing shareholders. The new company will be a pure play Gulf of Mexico driller. Pride International recently filed the plan with the Securities and Exchange Commission (SEC) and now awaits regulatory approval. The spinoff may work toward boosting shareholder value because energy investors tend to favor pure plays over diversified companies, which make it easier to invest according to sector trends. (For more on pure plays, read How to Invest in Commodities.)

Financials
Pride International has spent the last few years cleaning up its balance sheet and now is in excellent shape financially. At September 30, 2008, the company reported $428 million in cash and $701 million in debt. As recently as 2003, Pride
International's debt totaled $2 billion and its debt-to-capital ratio reached 55%, compared to its current level of 17%. The company's debt is comprised of two parts: a $500 million issue due in 2014 and a $227 million issue that matures in 2016.

Pride International is protected somewhat by its large backlog of contractually guaranteed revenue. As of September 30, 2008, the company's revenue from contractually guaranteed backlogs totaled $8.9 billion. Over the next five years, revenue from these sources will total:

Year Revenue
2009 $1.7 billion
2010 $1.3 billion
2011 $1.4 billion
2012 $1.3 billion
2013 $1.0 billion

Petroleo Brasileiro (NYSE:PBR) is a major Pride International customer that contributes $4.7 billion to Pride's backlog revenue. The result may be Petroleo Brasileiro receiving more leverage over Noble.

Risks
Pride International currently has a large number of rigs under construction for both the shallow and deep water segments of the market. The delivery schedule for these rigs is as follows.

Year Rigs Under Construction
2009 47
2010 69
2011 52
2012 37
2013 11

Bottom Line
There may not be sufficient demand to absorb Pride's International supply capacity coming on line in the next five years, which could lead to falling utilization and day rates. However, bear market in energy and the wide-reaching recession have not stopped Pride International from moving along with its transition to a deep water offshore drilling company. In addition, the company's spinoff of its shallow water assets may unlock shareholder value at the company. (Financial downturns are a part of the economic cycle and can have important long-term benefits. Learn why at Recession and Depression: They Aren't So Bad.)

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Are U.S. Stocks Still the Place To Be in 2016?

    Understand why U.S. stocks are absolutely the place to be in 2016, even though the year has gotten off to an awful start for the market.
  9. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  10. Investing

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  3. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center