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Pride International Inc. reported depressed first-quarter 2011 results, hurt by higher operating expenses and lower utilization.

The company’s quarterly earnings, excluding one-time items, of 21 cents per share, failed to meet the Zacks Consensus Estimate of 43 cents and was much lower than the year-earlier profit of 45 cents per share.

The company reported total revenue of $393.5 million, up 8.5% year over year, but slightly below the Zacks Consensus Estimate of $421 million.

Segmental Performance

Deepwater: The segment revenue grew 17% year over year to $259.1 million, but declined 4% sequentially, mainly due to lower utilization, coupled with higher segment operating costs from the addition of new rig capacity. The segment’s earnings from continuing operations declined 10.5% from the year-ago quarter to $78.3 million.

Average dayrate for the Deepwater fleet was $341,400 in the quarter, compared with $335,100 in the comparable quarter prior year. Of the Deepwater fleet, 91% was utilized, which remains in line with the year-earlier quarter.

As of March 31, 2011, the company had 85% of rig days for the remaining three quarters of 2011 under contract, while 75% were under contract in 2012, 58% in 2013, 46% in 2014, and 39% in 2015.

Midwater: The segment reported quarterly revenue of $99.3 million, up 5% year over year, attributable to a full quarter of utilization on the semisubmersible rig, Pride Venezuela. This was partially offset by 52 days at zero dayrate on the Pride South Atlantic for unplanned regulatory and operational issues. However, the segment’s operating earnings dropped substantially to $8.9 million from $30.9 million in the prior-year quarter.

Average dayrate in this segment was $255,200, slightly lower than $265,000 in the first quarter of 2010. However, utilization in the quarter increased to 72% from 66% in the year-ago quarter.

Currently, the company has 82% of rig days over the remaining three quarters in 2011 under contract along with 35% contracted for 2012, 14% for 2013 and none for 2014.

Independent Leg Jackup: Revenues from the segment came in at $17.1 million during the quarter, down substantially (almost 46%) from the year-ago quarter level of $31.6 million. The segment faced an operating loss of $7.1 million versus the year-ago loss of $1.2 million.

Average dayrate in this segment sank 10.3% year over year to $98,800. Utilization came in at 27% in the reported quarter, below 45% in the prior-year quarter.

Liquidity

Pride International incurred capital expenditures of $401 million in the quarter (including $338 million targeted toward the deepwater expansion program). The company expects its full-year total capital outlay to be $1.0 billion, including $763 million for the deepwater agenda.

As of March 31, 2011, cash balance stood at $45.8 million with a debt balance of $1,856.7 million, representing a debt-to-capitalization ratio of 28.9%.

Outlook

The offshore drilling contractor stated that revenues growth was capped by the U.S. moratorium on offshore drilling and political upheaval in the Middle East and North Africa, while the profit margin was hurt by deal-related costs.

In February, Ensco plc (ESV - Analyst Report) announced that it will acquire Pridein a cash and stock deal valued at $7.3 billion (with the price per share of $41.60). This move will make Ensco the world's second-largest offshore oil and gas driller behind Transocean Inc. (RIG - Analyst Report) with significant presence in lucrative deepwater markets off Brazil and West Africa.

Houston, Texas-based Pride is a leading offshore contract driller with operations in many active oil and natural gas basins of the world, including South America, the Gulf of Mexico, West Africa, the Mediterranean Sea, the Middle East, and Asia Pacific. On the other hand, London-based Ensco is the chief supplier of rigs in the North Sea, Southeast Asia, North America and the Middle East.

We believe the combined entity will create a significant offshore drilling competitor globally securing a premium valuation with high-quality assets.

We maintain our long-term Neutral recommendation for Pride, supported by a Zacks #3 Rank (short-term Hold rating).

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