MANAGEMENT & ECONOMICS: Merging contractors pursuing drilling rig contracts on a package basis

Paul Bragg, President and CEO of Pride International, was interviewed by Judy Maksoud, Offshore's International Editor, following the merger of drilling contractors Pride International and Marine Drilling.

Offshore: Jan Rask, President and CEO of Marine Drilling Inc., stated in an article in Offshore (May issue) that industry consolidation is taking place as the oil and gas industry pursues "industrialization." Where does this merger place Pride in terms of industrialization?

Bragg: I think we're taking steps to get there. I don't think industrialization has occurred yet. We're looking at an industry that is maturing and seeing customers consolidate. It's only natural that our companies consolidate as well. In most mature industries, you have just three or four companies that own the vast majority of assets. We're nowhere near that in the drilling industry. I believe there will be more consolidation.

Offshore: What is the downside of the merger?

Bragg: We haven't heard many complaints about this deal, and the people who did express concerns were more concerned about the valuation of the swap. They believed that Pride may have given up too much upside, because Pride has a fleet with tremendous operating leverage and financial leverage. We certainly considered that when we negotiated the terms and feel that due consideration was given to the strength of our upside, versus the strength of Marine Drilling's balance sheet and current cash flow generation. We feel we received a fair trade and believe it to be good for both sets of shareholders.

Offshore: As the third largest drilling company in the industry, how will you capitalize on this new position?

Bragg: There are a number of ways. One is the creation of value for shareholders. The markets provide a premium to companies of size, where there is liquidity in stock trading. Both Pride and Marine have been at the low end of the spectrum - our trading multiples have been lower than the larger companies.

Secondly, having a large global fleet puts us in a better position to work out more global deals. It is still a fairly early phenomenon, but something we and other large contractors are addressing. Customers with a large annual demand for rigs, particularly major and super-major producers, would benefit from long-term contracts for the number of rigs they expect to use. Such producers might average 60 rigs/year, but in a down year, could use 40 rigs/year. Rather than contracting each rig individually, they are in a position to do things on a fleet basis. And while nobody is really there today, there have been discussions towards comprehensive fleet contracting.

Thirdly, there is the ability to offer packages of rigs, something we see today. For example, you have two rigs coming to the maturity of contracts, and you might have the opportunity to provide more (rigs with different contract lengths in other areas). So you contract the rigs in a package, negotiating new contracts six or eight at a time, versus contracting them individually.

Going back to Jan Rask's statement on industrialization, you're able to take some of the peaks and valleys out of contracting when you match up your rig supply availability with customer needs on a longer-term basis and across multiple regions. That's where I believe the industry is headed.

Offshore: How will consolidation impact Pride's fleet?

Bragg: There are some standard things - consolidation leads to certain efficiencies when you're operating multiple rigs in an area or multiple rigs of one type in your fleet. You have spare parts and backup components that can be spread over a large number of units, creating cost efficiencies. Also, in our business, insurance is a major factor. The purchasing power of having a bigger fleet with more insured value leads to a better rate. Pride was already one of the largest in that regard, but adding the Marine Drilling fleet will help us. Size also matters when it comes to repairs and maintenance, replacement parts, standard procurement items, and standard consumable items. We've got well over 300 rigs in the fleet. On a combined basis, our purchasing power will be better than most.

Offshore: How will you deploy Pride's fleet?

Bragg: I see little change from today's deployment. The jackup fleet, particularly post-merger, has mostly 250-ft mat-supported rigs that are perfectly suited for the Gulf of Mexico, and there are fewer opportunities abroad for those. If jackups are repositioned outside the US Gulf, it will mostly be units with independent legs 300 ft or greater. And we don't mind seeing those leave.

As the international market for jackup rigs heats up, that will probably create some opportunities. In Pride's case, we're talking about a handful of rigs.

We expect to see opportunities within all of our fleet segments. We don't see any one as being weak today. Gulf of Mexico jackups have slacked off somewhat, but today, they're all still mostly working. Rates are still near their peak for this last cycle. Utilization is nearly 100%.

As far as new deployments go, our competing opportunities will be driven by return. I wouldn't tell you that there is a better opportunity for a newbuild, versus buying an old rig and fixing it up, or deepwater versus jackup or land. There are actually potential opportunities for all of them, and the ones we will pursue will be driven by the rate of return. So we're going to continue to view all of them for potential and price them to make good returns.

Offshore: It appears there are no newbuilds on your books. Are you planning to increase fleet size?

Bragg: We have just completed building two new deepwater semis; however, we're building five land rigs for ExxonMobil's Chad development project, which probably will be one of the most significant land development projects of the decade. We're also completing construction on an additional platform rig for our Gulf of Mexico fleet. And we just entered into an agreement with BP to build a deepwater platform rig for their fleet. It will be owned by BP, and we'll be the operator.

Offshore: What about life enhancement? Do you have a program in place for that?

Bragg: We've done some of that as well recently. First of all, we just finished a complete refurbishment of the Pride Montana, a 300-ft independent leg jackup that was out of service for almost a year. It has now been contracted for three years to Saudi Aramco. Secondly, we just did a significant upgrade to the Pride North Sea, a semisubmersible we purchased earlier this year. We added a third mud pump and made other improvements. The rig just started its first job off Ireland. Thirdly, we have one barge, the Bintang Kalimantan, undergoing a substantial upgrade and enhancement. The barge is in West Africa and will be going out on a two-year job off Nigeria. Fourthly, the Marine 500 will be outfitted with additional risers and tensioners so that it can work in 6,500 ft water depth instead of 5,000 ft.

Upgrading for technology is continual. Five years ago, a very small percentage of our fleet had top drives. Today, virtually every drilling rig has a top drive. We plan to upgrade every rig in the fleet over a 5-10-year period, depending on the type of asset. Generally speaking, you can take the total number of rigs in the fleet, and divide by six or seven, and determine how many per year. The result is a fair amount of upgrading on an annual basis. In October, when we do budgeting and capital planning, we'll take into consideration how many rigs we want to take out of service and to do major upgrades and how many will need sustaining upgrades and repairs. There are always significant contract opportunities that come along, for which we will perform customer-specific upgrades to alter rig capabilities. Our view is that working most of our rigs as they are configured now is usually the best alternative.

Offshore: The personnel issue is prominent in the industry now. With 10,000 employees, after the merger, will you have immediate problems or stopgaps to fix problems?

Bragg: Both contractors are running at high utilization, so neither company has extra people sitting around. Size in itself doesn't bridge any gap in this area. For international markets, most of our personnel are already from outside the US. For example, we have one labor pool from France, with about 1,700 French expatriates in the company. We also have 3,000 Argentineans, 2,000 Colombians, and 2,000 Venezuelans. There is some overlap between Pride's and Marine's Gulf of Mexico employees, but here, we get some skilled workers that we wouldn't otherwise have.

Offshore: Is the merger making your personnel position stronger?

Bragg: Workers follow opportunity. The bigger the organization, the broader the reach, the more things a company can become involved in. We're at the top of the list now, and that creates more opportunities for employees.

Offshore: What are your plans in next 6-12 months?

Bragg: One thing, not necessarily a change in philosophy connected with the merger, but one of the attractive items, is that we can dedicate more cash flow to debt service to reduce our debts. Combined, we will have nearly a 50% debt-to-capital ratio. Marine has just repaid the last of its debt, so all of its cash flow is unencumbered. Our debt-to-capital ratio should quickly move in line with that of our peers.

We have a large percentage of the fleet contracted on a multi-year basis, which generates attractive long-term cash flow. We'll utilize that to pay down the debt. Right now, drilling company share prices have dropped back a little bit and companies have announced share buybacks. But, rather than buying our stock shares back, we will pay down debt. If conditions decline, we will have better financial performance with a lower debt load. ;