Don Stowers, Editor; OGFJ
EDITORS NOTE: With operations in 30 countries and equity market capitalization of nearly $6 billion, Houston-based Pride International operates one of the largest drilling fleets in the world. Formerly over-leveraged, Pride last year named Louis Raspino as CEO with the aim of reorganizing and rebuilding the company in order to create greater value for shareholders. In this interview with OGFJ editor Don Stowers, Raspino explains how he plans to achieve his goals for the company.
OIL & GAS FINANCIAL JOURNAL: Pride has come a long way from its inauspicious beginnings as an oilwell service company with 6 workover rigs based in Alice, Tex., in 1966. The company has grown over the past 40 years to become one of the world’s largest drilling contractors with a global fleet of 279 rigs, more than 13,000 employees, and operations on 5 continents. You joined Pride as executive vice president and CFO in December of 2003, and you were named president and CEO in June of 2005. How do you hope to position the company for the long term, and what are your goals as far out as it’s possible to see?
LOUIS RASPINO: We are one of the youngest international drilling companies, among a group of legacy drillers. Our vision is to become primarily an offshore driller, increasing our focus in high quality offshore basins where we have significant expertise and where we see the greatest long-term potential. Pride grew in numerous directions by acquisition and by construction of new rigs during the 1990s through 2001. We are working today to focus the company’s future growth in deepwater floaters and higher specification jackups to position the company for greater profitability and long-term, disciplined growth.
OGFJ: What are some of the biggest challenges the company faces in meeting these goals?
LOUIS RASPINO: I think we face two significant challenges. First, to become the company I’ve described, we are working diligently to refocus our asset base. As the company grew to its present size, it developed both onshore and offshore operations in over 30 countries. Our business mix currently includes a fleet of over 200 land rigs in Latin America, as well as an E&P services division. We are actively pursuing options to divest these businesses, which performed at record levels in 2005. This will better allow us to accelerate our growth offshore, which is our long-term, primary focus area.
Another significant challenge we face, along with our peers, is recruiting, training, developing, and retaining the workforce necessary to support the explosive growth being experienced by the entire oil and gas industry. In this regard, we believe our industry is under-prepared for the next decade of growth, and we are intensely focused at Pride on initiatives to address this challenge.
OGFJ: Some companies operating in the Gulf of Mexico sustained significant damage in the aftermath of Hurricanes Rita and Katrina in 2005. Others fared better. What impact did these two storms have on Pride?
LOUIS RASPINO: We have 12 jackups working in the US Gulf, and we were very fortunate to have sustained virtually no damage to any of them during either hurricane. After undergoing a brief inspection, each unit returned to full service. In the US Gulf, we operate mat-supported jackups that sit flat on the seabed. During the most severe hurricane conditions, the design of these rigs allowed them to shift slightly on the seafloor instead of breaking off legs, as was experienced by others with their independent leg rigs that penetrate the seabed. We only had one small platform rig damaged. It did not return to work.
OGFJ: How are technological advances affecting the way in which Pride does business? That is, how costly is it for the company to implement the latest drilling technology, and what is the impact on the bottom line?
LOUIS RASPINO: Our fleet has a mix of traditionally equipped land rigs, jackups, and floaters, together with 5th generation drillships and dynamically positioned semisubmersibles. Without a doubt, the cost of high-tech equipment, particularly deepwater offshore, has increased enormously over recent years; and as we consider growth opportunities involving 6th generation floaters costing in the range of $600 million and capable of working in 10,000-12,000 feet of water, our adherence to financial discipline becomes especially critical. Additionally, the lead time for most rig components, including critical spare parts, has stretched from a few months to more than a year in many cases, and their cost has increased significantly. This necessitates that we plan our business better, improve our supply chain management, and forecast our needs further into the future than ever before.
OGFJ: How difficult is it to maintain such a far-flung fleet of marine and land rigs? Is this cost-effective for the company?
LOUIS RASPINO: It’s always been demanding to work internationally. Our numerous locations around the world, which include some extremely remote areas like Chad, the North Caspian Sea, and many regions of South America, present a range of procurement, transport, and other operational challenges. We have successfully provided a broad range of drilling services worldwide with a highly motivated, extremely professional cadre of managers and employees. We place enormous emphasis on safety, ethical business dealings, and environmental stewardship at all levels of our business worldwide. As we move to reposition the company more offshore, with fewer classes of assets positioned in selected offshore basins, we expect to realize cost savings and operating efficiencies by reducing the number of bases, support facilities, procurement lines, and other infrastructure activities.
OGFJ: How dependent is the company on the whims of the market in what is traditionally a cyclical industry? That is, do you make a lot of money when commodity prices are high, and conversely, do you lose revenues due to idle equipment when the industry is in the tank?
LOUIS RASPINO: Historically, that has been the case. However, the changes we are putting in place now should reduce our risk in future cyclical downturns. The lower specification assets included in our offshore fleet are potentially more exposed to cyclical downturns than our higher specification assets. While commodity prices may decline at some point and rig contracting rates may decrease, our goal is to minimize idle equipment in downturns by growing the company’s exposure to deepwater floaters and higher specification jackups. Even in a weak market, we believe these classes of equipment will be working at meaningful day rates, as they allow us to focus on providing drilling services for customers with projects that have long-term horizons and do not get deferred when commodity prices turn down.
OGFJ: Do you expect these cycles to continue? Why or why not?
LOUIS RASPINO: It is unrealistic to think that we will not continue to face long-term cyclicality in our industry. That being said, there is a lot we are doing today to position Pride to thrive in the current upcycle and, at the same time, better prepare ourselves for the next downcycle, whenever it may occur. Historically, energy cycles have turned down rather quickly, with recovery painfully slow. For a variety of reasons, we believe the current upcycle has a much longer and stronger reach, which affords us the opportunity to reposition Pride strategically. There will likely be a flattening, or perhaps a downturn, further out. However, with demand currently contracted for offshore drilling stretching to 2010 and beyond, our clients do not appear to anticipate a decrease in demand for our services anytime soon.
OGFJ: What do you see as the best opportunities for Pride?
LOUIS RASPINO: As I mentioned, we’re working to focus the company’s growth primarily offshore. We have critical mass in the Gulf of Mexico with 31 rigs, including 23 jackups working in the US and Mexican sectors, and a solid presence offshore Brazil, West Africa, the Mediterranean, and the Middle East/India. As we grow our asset base while divesting non-core assets, we expect to increase our presence in these high-quality offshore basins.
OGFJ: What obstacles could prevent you from taking advantage of them?
LOUIS RASPINO: In addition to an unanticipated significant weakening of commodity prices, as I mentioned earlier, one of the primary threats to future success in this industry is the lack of a sufficient, qualified workforce to support the industry’s expected growth. Also, there is the risk that the large number of new offshore rigs scheduled to enter the marketplace over the next several years, many of which are being built by speculators, could create an oversupply if strong customer demand does not continue. And lastly, the current extreme demand for rig components, critical spare parts, and shipyard services is causing large cost increases and very extended delivery times for equipment, services, and parts needed to maintain our fleet and construct new rigs.
OGFJ: Do you have problems recruiting and retaining good employees - domestically, internationally, and among the professional staff?
LOUIS RASPINO: As I’ve mentioned several times, this is one of the biggest issues faced today by the entire oil and gas industry. Our need to recruit numerous, high potential people is greater than ever, as we currently have the best career opportunities available in the history of our industry. Adding to this challenge, a high percentage of the industry’s workforce is approaching retirement age over the next decade, especially in critical management and supervisory positions. We currently do not face the same extent of recruiting challenges internationally as we do in the US for both rig and professional staff. However, hiring and retaining the right people in every position is going to be an increasingly difficult challenge worldwide over the next several years as numerous new rigs enter the marketplace.
OGFJ: Looking at Pride’s financial results for 2002-2004, revenues and gross profits increased annually, but net income showed a loss each year. Then in 2005, you reported strong net income. Can you explain what you did to improve the bottom line for Pride’s shareholders?
LOUIS RASPINO: When I joined the company as CFO at the end of 2003, the company was facing several issues, including ongoing losses from third-party, fixed-fee construction projects, which eventually totaled approximately $130 million over 2003-2004. We immediately moved to complete those projects, and we have now exited that business. Also, during that period, Pride was carrying a very high debt level, in the range of 55% debt to total capitalization, with associated high interest expense. At the beginning of 2004, we established debt reduction as our highest priority for redefining the company, and by late 2005 we had reduced debt by approximately $900 million. Having substantially increased the company’s financial strength and flexibility, we were able to execute a very attractive acquisition at the end of 2005, which increased our interest in a strategically important joint venture in deepwater offshore Angola.
We also strengthened our management team. In fact, 15 of our 17 officers are either new to the company or new to their positions, and we are driving a culture of accountability across the company. Over the last two years, we have significantly improved the company’s infrastructure, which had lagged behind the company’s rapid growth. We put in place a number of new internal controls and cost management measures, and we implemented an aggressive new marketing strategy.
Beginning in 2004, we began the process of rationalizing the company’s asset base, and we have since received proceeds of approximately $250 million from disposing of non-core assets - contributing to our improved financial flexibility, which allows us to pursue further expansion opportunities in our areas of strategic focus. Due in large part to the success of all these steps, in 2005 our financial results were significantly improved with record revenue of over $2.0 billion, earnings from operations of $325 million, and net earnings of $129 million, nearly a four-fold increase over 2004
OGFJ: Are there any near-term capital investments in your plans?
LOUIS RASPINO: As mentioned earlier, we are considering several growth opportunities in high-specification deepwater floaters and jackups. For some time, we have been addressing design and construction criteria with our customers with a focus on achieving an attractive return on investment for such substantial assets as 6th generation drillships and semisubmersibles.
One of the best examples of executing a financially-disciplined growth strategy is our recent acquisition of an additional 40% interest in our Angolan joint venture, increasing our total interest to 91%. In this transaction, we effectively purchased 40% of two 5th generation, deepwater drillships, a 300-foot ILC jackup, and management contracts for drilling operations on two new 5th generation rigs that are operating on technically-sophisticated, deepwater tension-leg platforms - all for an implied JV total value of approximately $700 million. We expect this acquisition will provide an attractive return on investment with significant upside as the existing four-year contracts for the drillships, at approximately $170,000/day, expire and are renegotiated at significantly higher rates.
OGFJ: Pride recently announced it had delayed the filing of its 2005 annual report on Form 10-K. In the same announcement, Pride said that it had received allegations of possible improper payments to foreign government officials going back a number of years and was investigating. What can you tell us about this, and when is the matter likely to be resolved?
LOUIS RASPINO: During the course of an internal audit and investigation relating to certain of our Latin American operations, our management and internal audit department received allegations relating to improper payments to foreign government officials going back a number of years. Our audit committee has assumed direct responsibility over the investigation of the allegations, as well as of various accounting entries and internal control issues. We have voluntarily apprised the US Securities and Exchange Commission and the Department of Justice of the allegations. In light of the status of the audit committee’s ongoing investigation, we concluded that we cannot file our 2005 annual report until additional information is obtained, including information necessary for us to complete our assessment of our system of internal controls and the accuracy of our books and records.
The audit committee’s investigation is being pursued aggressively, but we can’t currently determine when we’ll be in a position to file our Form 10-K. We did, however, release unaudited 2005 financials on March 17th with the record financial results we discussed earlier.
In regard to the investigation, as I have publicly stated many times, ethics and integrity form the very core of the value system and culture that we are driving at Pride. The board, management team, and I are taking these allegations very seriously, and we will take aggressive, corrective action, as appropriate.
OGFJ: Is there anything else you would like to say about the company’s operations and plans going forward?
LOUIS RASPINO: I would just like to re-emphasize that we at Pride International are energized about the future of our industry and the opportunities it holds for our company. The challenges are substantial, but we have a robust market environment, motivated employees, and the financial strength to grow shareholder value in a disciplined manner. While we describe 2004 and 2005 as turnaround years, we believe that 2006 and onward will provide opportunities for significant growth at Pride.
Thank you for taking the time to talk with us.
Mat-supported jackups fared well in hurricanes
While working to reposition the company for growth in deepwater and higher specification jackups, Pride continues to operate over 20 mat-supported jackups in the Gulf of Mexico. Contracts on these rigs continue to re-price at record day rates with 100% utilization and clients waiting for availability. While all were designed and commissioned in the late 1970s and early 1980s, these rigs have benefited from an interesting feature demonstrated during the 2005 hurricane season. Because their legs do not penetrate the seabed floor, these rigs withstood violent wave motion versus breaking sideways with the onset of a huge wave. Pride’s mat jackup fleet sustained virtually no damage during Hurricanes Katrina and Rita despite several Pride rigs being directly in the path of both storms.
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