================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13289
-------------------
PRIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0069030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5847 SAN FELIPE, SUITE 3300
HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
(713) 789-1400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practical date.
Outstanding as of May 4, 2004
Common Stock, par value $.01 per share 135,803,391
================================================================================
PRIDE INTERNATIONAL, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2004 and December 31, 2003............................ 2
Consolidated Statement of Operations for the three months ended March 31, 2004 and 2003.......... 3
Consolidated Statement of Cash Flows for the three months ended March 31, 2004 and 2003.......... 4
Notes to Unaudited Consolidated Financial Statements............................................. 5
Report of Independent Accountants................................................................ 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................... 22
Item 4. Controls and Procedures...................................................................... 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................. 24
Signatures........................................................................................... 25
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRIDE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUES)
MARCH 31, DECEMBER 31,
2004 2003
------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................... $ 40,912 $ 69,134
Restricted cash............................................................. 42,888 38,840
Trade receivables, net...................................................... 362,899 371,510
Parts and supplies, net..................................................... 76,154 73,763
Deferred income taxes....................................................... 3,380 3,371
Other current assets........................................................ 173,876 170,306
------------- -------------
Total current assets................................................... 700,109 726,924
------------- -------------
PROPERTY AND EQUIPMENT, net................................................... 3,408,199 3,446,331
------------- -------------
OTHER ASSETS
Investments in and advances to affiliates................................... 35,771 33,984
Goodwill.................................................................... 68,651 69,014
Other assets................................................................ 96,087 102,177
------------- -------------
Total other assets..................................................... 200,509 205,175
------------- -------------
$ 4,308,817 $ 4,378,430
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................................ $ 147,774 $ 163,707
Accrued expenses............................................................ 267,121 260,098
Deferred income taxes....................................................... 957 957
Short-term borrowings....................................................... 58,411 27,555
Current portion of long-term debt........................................... 190,088 188,737
Current portion of long-term lease obligations.............................. 5,319 2,749
------------- -------------
Total current liabilities.............................................. 669,670 643,803
------------- -------------
OTHER LONG-TERM LIABILITIES................................................... 48,365 54,423
LONG-TERM DEBT, net of current portion........................................ 1,731,681 1,805,099
LONG-TERM LEASE OBLIGATIONS, net of current portion........................... 6,743 9,979
DEFERRED INCOME TAXES......................................................... 44,891 59,378
MINORITY INTEREST............................................................. 108,906 102,969
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 50,000 shares authorized;
none issued.............................................................. -- --
Common stock, $.01 par value; 400,000 shares authorized;
136,156 and 135,769 shares issued; 135,786 and 135,400
shares outstanding....................................................... 1,361 1,358
Paid-in capital............................................................. 1,266,874 1,261,073
Treasury stock, at cost..................................................... (4,409) (4,409)
Accumulated other comprehensive loss........................................ (1,006) (124)
Deferred compensation....................................................... (2,375) --
Retained earnings........................................................... 438,116 444,881
------------- -------------
Total stockholders' equity............................................. 1,698,561 1,702,779
------------- -------------
$ 4,308,817 $ 4,378,430
============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
2
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ---------
REVENUES
Services ........................................... $ 403,675 $ 344,300
Sales .............................................. 29,890 51,121
--------- ---------
Total revenues ................................. 433,565 395,421
--------- ---------
COSTS OF SERVICES AND SALES, excluding depreciation and
amortization
Services ........................................... 259,299 211,819
Sales .............................................. 51,193 47,701
--------- ---------
Total costs of services and sales, excluding
depreciation and amortization ............. 310,492 259,520
--------- ---------
DEPRECIATION AND AMORTIZATION ........................... 66,337 61,742
GENERAL AND ADMINISTRATIVE, excluding depreciation and
amortization.......... ............................. 26,989 23,745
--------- ---------
EARNINGS FROM OPERATIONS ................................ 29,747 50,414
OTHER INCOME (EXPENSE)
Interest expense ................................... (30,587) (34,678)
Interest income .................................... 307 254
Other expense, net ................................. (1,306) (3,264)
--------- ---------
Total other expense, net ....................... (31,586) (37,688)
--------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (1,839) 12,726
INCOME TAX PROVISION (BENEFIT) .......................... (1,011) 3,485
MINORITY INTEREST ....................................... 5,937 5,261
--------- ---------
NET EARNINGS (LOSS) ..................................... $ (6,765) $ 3,980
========= =========
NET EARNINGS (LOSS) PER SHARE
Basic .......................................... $ (0.05) $ 0.03
Diluted ........................................ $ (0.05) $ 0.03
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic .......................................... 135,542 134,131
Diluted ........................................ 135,542 134,840
The accompanying notes are an integral part of the consolidated
financial statements.
3
PRIDE INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ---------
OPERATING ACTIVITIES
Net earnings (loss) ................................................ $ (6,765) $ 3,980
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities -
Depreciation and amortization .................................. 66,337 61,742
Discount amortization on zero coupon convertible debentures..... 13 1,406
Amortization of deferred loan costs ............................ 1,763 1,971
(Gain) loss on sale of assets .................................. (121) 62
Deferred income taxes .......................................... (14,261) (10,171)
Minority interest .............................................. 5,937 5,261
Changes in assets and liabilities
Trade receivables ......................................... 8,611 (40,377)
Parts and supplies ........................................ (2,391) (11,581)
Other current assets ...................................... (3,833) (70,384)
Other assets .............................................. 4,553 46,003
Accounts payable .......................................... (9,911) 4,840
Accrued expenses .......................................... 7,538 2,104
Other liabilities ......................................... (5,901) 4,886
--------- ---------
Net cash provided by (used in) operating activities ... 51,569 (258)
--------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment ................................ (35,289) (62,809)
Proceeds from dispositions of property and equipment ............... 182 139
Investments in and advances to affiliates .......................... (1,787) (298)
--------- ---------
Net cash used in investing activities ..................... (36,894) (62,968)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of common stock ............................. 1,535 1,265
Proceeds from exercise of stock options ............................ 1,662 121
Proceeds from debt borrowings ...................................... 30,770 110,991
Reduction of debt .................................................. (72,816) (133,841)
(Increase) decrease in restricted cash ............................. (4,048) 19,953
--------- ---------
Net cash used in financing activities ..................... (42,897) (1,511)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................... (28,222) (64,737)
CASH AND CASH EQUIVALENTS, beginning of period .......................... 69,134 133,986
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ................................ $ 40,912 $ 69,249
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
4
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Principles of Consolidation and Reporting
The unaudited consolidated financial statements included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Certain
reclassifications have been made to the prior periods' condensed financial
statements to conform with the current period presentation. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto of Pride International, Inc.
(the "Company" or "Pride") included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003.
In the opinion of management, the unaudited consolidated financial
information included herein reflects all adjustments, consisting only of normal
recurring adjustments, which are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows for the
interim periods presented. The results of operations for the interim periods
presented herein are not necessarily indicative of the results to be expected
for a full year or any other interim period.
PricewaterhouseCoopers LLP, the Company's independent auditors, have
performed a review of the unaudited consolidated financial statements included
herein in accordance with standards established by the American Institute of
Certified Public Accountants. Pursuant to Rule 436(c) under the Securities Act
of 1933, the report of PricewaterhouseCoopers LLP, included herein, should not
be considered a part of any registration statement prepared or certified within
the meanings of Sections 7 and 11 of the Securities Act, and the liability
provisions of Section 11 of the Securities Act do not apply to such report.
In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 46R, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51 (revised December 2003)." FIN No. 46R
requires a company to consolidate a variable interest entity, as defined, when
the company will absorb a majority of the variable interest entity's expected
losses, receive a majority of the variable interest entity's expected residual
returns, or both. It was determined that the unaffiliated trust with which the
Company completed the sale and leaseback of the Pride South America
semisubmersible drilling rig in February 1999 would qualify for consolidation as
a variable interest entity in which the Company is the primary beneficiary, as
defined. Pursuant to the recommendation of FIN No. 46R, the Company elected in
the fourth quarter of 2003 to retroactively adopt the provisions and restate
previously issued financial statements for the applicable periods for
comparability purposes. The effect on the Company's consolidated statement of
operations for the three months ended March 31, 2003 was as follows:
THREE MONTHS ENDED
MARCH 31, 2003
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net earnings -- as reported ................................. $ 3,748
Add:
Lease rental expenses included in reported net earnings.... 3,176
Deduct:
Depreciation expense ...................................... (945)
Interest expense .......................................... (1,999)
-------
Net earnings -- as adjusted ................................. $ 3,980
=======
NET EARNINGS PER SHARE:
Basic -- as reported ........................................ $ 0.03
Basic -- as adjusted ........................................ $ 0.03
Diluted -- as reported ...................................... $ 0.03
Diluted -- as adjusted ...................................... $ 0.03
5
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income
Comprehensive income is the change in the Company's equity from all
transactions except those resulting from investments by or distributions to
owners. Comprehensive income (loss) was as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
---------- --------
(IN THOUSANDS)
Net earnings (loss)...................................... $ (6,765) $ 3,980
Foreign currency translation gain (loss), net............ (882) 1,065
--------- --------
Comprehensive income (loss).............................. $ (7,647) $ 5,045
========= ========
Management Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates and
adjustments on historical experience and on other information and assumptions
that are believed to be reasonable under the circumstances. Estimates and
judgments about future events and their effects cannot be perceived with
certainty; accordingly, these estimates may change as additional information is
obtained, as more experience is acquired, as the Company's operating environment
changes and as new events occur. While it is believed that such estimates are
reasonable, actual results could differ from those estimates. Estimates are used
for, but not limited to, determining the realization of customer and insurance
receivables, recoverability of long-lived assets, useful lives for depreciation
and amortization, determination of income taxes, contingent liabilities,
insurance and legal accruals and costs to complete construction projects.
Rig Construction Contracts
The Company has historically constructed drilling rigs only for its own
use. However, at the request of some of its significant customers, the Company
entered into lump-sum contracts in 2001 and 2002 to design, construct and
mobilize specialized drilling rigs through the Company's technical services
group. The Company also entered into contracts to operate the rigs on behalf of
the customers. Construction contract revenues and related costs are recognized
under the percentage-of-completion method of accounting using measurements of
progress toward completion appropriate for the work performed, such as
man-hours, costs incurred or physical progress. Accordingly, the Company reviews
contract price and cost estimates periodically as the work progresses and
reflects adjustments in income (i) to recognize income proportionate to the
percentage of completion in the case of projects showing an estimated profit at
completion and (ii) to recognize the entire amount of the loss in the case of
projects showing an estimated loss at completion. To the extent these
adjustments result in an increase in previously reported losses or a reduction
in or an elimination of previously reported profits with respect to a project,
the Company would recognize a charge against current earnings. See Note 2.
Stock-Based Compensation
The Company uses the intrinsic value based method of accounting for
stock-based compensation prescribed by Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" and related interpretations. Under
this method, the Company records no compensation expense for stock options
granted when the exercise price for options granted is equal to the fair market
value of the Company's stock on the date of the grant.
If the fair value based method of accounting prescribed by Statement of
Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based
Compensation" had been applied, the Company's pro forma net earnings (loss), net
earnings (loss) per share and stock-based compensation cost would approximate
the amounts indicated below. The effects of applying SFAS No. 123 in this pro
forma disclosure are not indicative of future amounts.
6
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2004 2003
----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net earnings (loss), as reported............................. $ (6,765) $ 3,980
Add: Stock-based compensation included in reported net
earnings (loss), net of tax................................ -- --
Deduct: Stock-based employee compensation expense
determined under the fair value method, net of tax......... (3,382) (2,992)
----------- -----------
Pro forma net earnings (loss)................................ $ (10,147) $ 988
=========== ===========
Net earnings (loss) per share:
Basic -- as reported....................................... $ (0.05) $ 0.03
Basic -- pro forma......................................... $ (0.07) $ 0.01
Diluted -- as reported..................................... $ (0.05) $ 0.03
Diluted -- pro forma....................................... $ (0.07) $ 0.01
In January 2004, the Company awarded a total of 125,000 restricted shares
to certain key employees pursuant to the Company's long-term incentive plan. The
Company recorded unearned compensation as a reduction of stockholders' equity
based on the closing price of the Company's common stock on the date of grant.
The unearned compensation will be recognized ratably over the applicable vesting
period.
Supplemental Cash Flow Information
Non-cash transactions for the three months ended March 31, 2004 and 2003
consisted of decreases in accounts payable for capital expenditures of $4.3
million and $18.6 million, respectively.
2. CONSTRUCTION PROJECTS
In 2001 and 2002, at the request of two major international oil company
customers, the Company entered into lump-sum contracts to design, engineer,
manage construction of and commission four deepwater platform drilling rigs for
installation on spars and tension-leg platforms. The Company also entered into
contracts to provide drilling operations management of the rigs once they have
been installed on platforms. The first rig commenced operations in November
2003. The other rigs are expected to enter into service in late 2004 and early
2005.
For the three-month period ended March 31, 2004, the Company recorded loss
provisions of $21.3 million relating to the construction of the rigs. The loss
provisions principally consisted of additional provisions for higher
commissioning costs for the rigs, the costs of settling certain commercial
disputes with equipment vendors and sub-contractors and revised estimates for
other cost items.
The Company's technical services segment is performing these deepwater
platform rig construction projects under lump-sum contracts with its customers.
Revenues and costs realized on these lump sum contracts vary from the originally
estimated amounts. Unforeseen events may result in further cost overruns to
complete these projects, which could be material and which would require the
Company to record additional loss provisions in future periods. Such events
could include variations in labor and equipment productivity over the remaining
term of the contract, unanticipated cost increases, engineering changes,
shipyard or systems problems, project management issues, shortages of equipment,
materials or skilled labor, unscheduled delays in the delivery of ordered
materials and equipment, work stoppages, shipyard unavailability or delays.
7
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT
Short-Term Borrowings
On March 3, 2004, the Company entered into a short-term unsecured term loan
with a bank for $30.0 million, with an interest rate of LIBOR plus 3%. The term
loan was paid in full on April 30, 2004.
The Company has agreements with several banks for other unsecured
short-term lines of credit totaling $53.0 million, primarily denominated in U.S.
dollars. Of these facilities, $50.3 million are renewable annually and bear
interest at variable rates based on LIBOR. As of March 31, 2004, $28.4 million
was outstanding under these facilities and $24.6 million was available.
Long-Term Debt
Long-term debt consisted of the following:
MARCH 31, DECEMBER 31,
2004 2003
------------- -------------
(IN THOUSANDS)
Senior secured term loan.......................................... $ 196,508 $ 197,000
Senior secured revolving credit facilities........................ 254,000 288,000
9 3/8% Senior Notes due 2007...................................... 175,000 175,000
10% Senior Notes due 2009......................................... 200,000 200,000
Drillship loans................................................... 172,562 182,674
Semisubmersible loans............................................. 234,837 260,558
2 1/2% Convertible Senior Notes due 2007.......................... 300,000 300,000
3 1/4% Convertible Senior Notes due 2033.......................... 300,000 300,000
Zero Coupon Convertible Senior Debentures Due 2021................ 4 4
Zero Coupon Convertible Subordinated Debentures Due 2018.......... 1,111 1,098
Senior convertible notes payable.................................. 85,853 85,853
Limited-recourse collateralized term loans........................ 1,894 3,649
------------- -------------
1,921,769 1,993,836
Current portion of long-term debt................................. 190,088 188,737
------------- -------------
Long-term debt, net of current portion............................ $ 1,731,681 $ 1,805,099
============= =============
Senior Secured Term Loan and Senior Secured Revolving Credit Facilities
The Company entered into senior secured credit facilities with a group of
banks providing for aggregate availability of up to $447.0 million, consisting
of a $197.0 million term loan maturing in January 2009 and a $250.0 million
revolving credit facility maturing in January 2007. Borrowings under the
revolving credit facility are available for general corporate purposes. The
Company may issue up to $50.0 million of letters of credit under the facility.
As of March 31, 2004, $125.0 million of borrowings and an additional $4.8
million of letters of credit were outstanding under the revolving credit
facility.
Borrowings under the facilities currently bear interest at variable rates
based on LIBOR plus a spread based on the credit rating of the facility or, if
unrated, index debt. The interest rate was 3.66% for the term loan and 3.08% for
the revolving credit facility as of March 31, 2004.
As of March 31, 2004, the Company had a senior secured revolving credit
facility with non-U.S. banks that provides aggregate availability of up to
$180.0 million, including $10.0 million of letters of credit. Borrowings under
the credit facility bear interest at variable rates based on LIBOR plus a spread
ranging from 1.2% to 2.1%. As of March 31, 2004, $129.0 million of borrowings
and an additional $9.6 million of letters of credit were outstanding under this
credit facility, and the interest rate was 2.87%.
As of March 31, 2004, the Company had $161.6 million in aggregate
availability under its senior secured revolving credit facilities. Indentures
governing the Company's outstanding 9 3/8% and 10% senior notes limit its
ability to borrow under these facilities to a percentage of consolidated net
tangible assets.
As of March 31, 2004, $42.9 million of the Company's cash balances, which
amount is included in restricted cash, consists of funds held in trust in
connection with the Company's drillship and semisubmersible loans and its
limited-
8
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
recourse collateralized term loans and, accordingly, is not available for use by
the Company.
4. INCOME TAXES
The Company's consolidated effective income tax rate for the three months
ended March 31, 2004 was 55.0% as compared to 27.4% for the corresponding period
in 2003. The higher rate for 2004 is principally the result of an increase in
expected taxable income for 2004 in high effective tax rate countries in Latin
America, lower net income in foreign jurisdictions with low or zero effective
tax rates and income taxes in "deemed profit jurisdictions" despite low or
minimal earnings in such jurisdictions.
5. NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share has been computed based on the weighted
average number of shares of common stock outstanding during the applicable
period. Diluted net earnings (loss) per share has been computed based on the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period, as if stock options, convertible debentures and
other convertible debt were converted into common stock, after giving
retroactive effect to the elimination of interest expense, net of income tax
effect, applicable to the convertible debentures and other convertible debt.
The following table presents information to calculate basic and diluted net
earnings (loss) per share:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ---------
(IN THOUSANDS)
Net earnings (loss) ................................... $ (6,765) $ 3,980
Interest expense on convertible debentures and notes... -- --
Income tax effect ..................................... -- --
--------- ---------
Adjusted net earnings (loss) .......................... $ (6,765) $ 3,980
========= =========
Weighted average shares outstanding ................... 135,542 134,131
Convertible debentures and notes ...................... -- --
Stock options ......................................... -- 709
--------- ---------
Adjusted weighted average shares outstanding .......... 135,542 134,840
========= =========
The calculation of diluted weighted average shares outstanding for the
three months ended March 31, 2004 and 2003 excludes 38.8 million and 34.3
million common shares, respectively, issuable pursuant to convertible debt and
outstanding options. These shares were excluded as their effect was antidilutive
or the exercise price of stock options exceeded the average price of the
Company's common stock for the period.
9
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN JOINT VENTURE
The Company has a 30.0% equity interest in a joint venture company that is
currently completing construction of two dynamically-positioned, deepwater
semisubmersible drilling rigs, the Pride Portland and the Pride Rio de Janeiro.
The Pride Rio de Janeiro is undergoing final commissioning in Brazil, and the
Pride Portland is expected to leave the shipyard in Maine in May 2004. The joint
venture company has financed 87.5% of the cost of construction of these rigs
through fixed rate notes, with repayment of the notes guaranteed by the United
States Maritime Administration ("MARAD"). The notes are non-recourse to any of
the joint venture owners, except that, in order to make available an additional
$21.9 million under the MARAD-guaranteed notes to fund the project through the
sea and drilling trial stage for each rig, the Company has provided:
- a $25.0 million letter of credit to secure principal and interest
payments due under the notes, the payment of costs of removing or
contesting liens on the rigs and the payment of debt of the joint
venture company to MARAD in the event MARAD's guarantee is drawn;
- a guarantee of any cash in excess of the additional $21.9 million
required to get the rigs through the sea and drilling trial stage and
obtain their class certificates; and
- a guarantee of the direct costs of the voyage of each rig from any
foreign jurisdiction in which it is located to a U.S. Gulf port
nominated by MARAD in the event of a default prior to the rig obtaining
a charter of at least three years in form and substance satisfactory to
MARAD and at a rate sufficient to pay operating costs and debt service.
The other joint venture partner has agreed to reimburse the Company that
partner's proportionate share of any draws under the letter of credit or
payments under the guarantees. To secure those reimbursements, the Company has
set-off rights against, and rights to keep as collateral any payments on, the
$85.9 million of convertible senior notes of the Company held by the joint
venture partner. The Company currently expects that funds in excess of the
additional $21.9 million will not be required to get the rigs through the sea
and drilling trial stage and obtain their class certificates. Additional funds
may, however, be required. Any additional funding is expected to be made by
additional capital contributions by the joint venture partners.
The 12.5% of the cost of construction not funded under the MARAD-guaranteed
notes is being provided by the joint venture company from equity contributions
that have been made by the joint venture partners. In addition, the joint
venture partners have provided equity contributions to finance all of the
estimated $5.2 million of incremental costs associated with upgrading both rigs
to a water depth capability of 1,700 meters from the original design of
approximately 1,500 meters, of which the Company's 30% share is approximately
$1.6 million. Through March 31, 2004, the Company's equity contributions to the
joint venture totaled $35.5 million, including capitalized interest of $7.6
million and the contributions of $1.6 million in connection with the water depth
upgrades.
The Pride Portland and Pride Rio de Janeiro are being built to operate
under long-term contracts with Petrobras; however, Petrobras has given notice of
cancellation of those contracts for late delivery. Based on current demand for
deepwater drilling rigs, the Company believes that Petrobras or another customer
will employ the Pride Portland and Pride Rio de Janeiro under new or amended
contracts. There can be no assurance, however, that either the Pride Portland or
the Pride Rio de Janeiro will be contracted to Petrobras or to any other
customer. If no contract is obtained before the rigs are commissioned,
the rigs will be stacked. In this case, the joint venture partners would need to
advance further funds to the joint venture company to allow it to pay stacking
costs (estimated to be approximately $1 million per rig per month) as well as
principal and interest payments on the debt as they become due since the joint
venture company would have no alternative source of funds to allow it to make
such payments. Initial interest and debt service payments in respect of
construction debt for the two rigs are expected to total approximately $23.0
million during 2004, of which the Company's 30% share would be $6.9 million. The
letter of credit could be drawn for the full $23.0 million in debt service if
not paid by the joint venture company.
If the joint venture company failed to cover its debt service requirements,
a default would occur under the fixed rate notes guaranteed by MARAD. MARAD
would be entitled to foreclose on the mortgages related to the Pride Portland
and the Pride Rio de Janeiro and take possession of the two rigs.
10
PRIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT INFORMATION
In January 2004, the Company reorganized its operating segments to achieve
a more rational geographic distribution and to establish better defined lines
of accountability and responsibility for the sectors of its business. The
Company now has six principal operating segments: Eastern Hemisphere, which
comprises the Company's offshore and land drilling activity in Europe, Africa,
the Middle East, Southeast Asia, Russia and the Commonwealth of Independent
States; Western Hemisphere, which comprises the Company's offshore drilling
activity in Latin America, currently Brazil, Mexico and Venezuela; U.S. Gulf of
Mexico, which comprises the Company's U.S. offshore platform and jackup rig
fleets; Latin America Land; E&P Services; and Technical Services. The following
table sets forth selected consolidated financial information of the Company by
operating segment:
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2004 2003 (1)
------------------ -----------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenues:
Eastern Hemisphere ................................... $ 143.0 33.0% $ 142.2 36.0%
Western Hemisphere ................................... 109.2 25.2 85.3 21.5
U.S. Gulf of Mexico .................................. 27.0 6.2 18.2 4.6
Latin America Land ................................... 89.0 20.5 73.1 18.5
E&P services ......................................... 34.2 7.9 24.6 6.2
Technical services ................................... 31.2 7.2 52.0 13.2
-------- ----- -------- -----
Total ........................................... 433.6 100.0 395.4 100.0
-------- ----- -------- -----
Costs of Services and Sales, excluding depreciation
and amortization:
Eastern Hemisphere ................................... 75.5 24.3 72.6 28.0
Western Hemisphere ................................... 66.5 21.4 42.8 16.5
U.S. Gulf of Mexico .................................. 23.4 7.5 22.9 8.8
Latin America Land ................................... 67.7 21.8 50.7 19.5
E&P services ......................................... 25.1 8.1 18.1 7.0
Technical services ................................... 52.3 16.9 52.4 20.2
-------- ----- -------- -----
Total ........................................... 310.5 100.0 259.5 100.0
-------- ----- -------- -----
Segment Profit (Loss), excluding depreciation
and amortization:
Eastern Hemisphere ................................... 67.5 54.8 69.6 51.2
Western Hemisphere ................................... 42.7 34.7 42.5 31.3
U.S. Gulf of Mexico .................................. 3.6 2.9 (4.7) (3.5)
Latin America Land ................................... 21.3 17.3 22.4 16.5
E&P services ......................................... 9.1 7.4 6.5 4.8
Technical services ................................... (21.1) (17.1) (0.4) (0.3)
Depreciation and amortization ........................ 66.3 61.7
General and administrative, excluding depreciation
and amortization ................................... 27.0 23.8
-------- --------
Earnings from operations ............................. $ 29.8 $ 50.4
======== ========
(1) The consolidated financial information by operating segment for the
three months ended March 31, 2003, has been restated to reflect the Company's
new operating segments and to reflect the retroactive adoption of FIN No. 46R,
"Consolidation of Variable Interest Entities."
Significant Customers
Two customers each accounted for approximately 10% of consolidated revenues
for the quarter ended March 31, 2004, which amounts are included in Eastern and
Western Hemisphere segments, respectively. No single customer accounted for 10%
or more of consolidated revenues for the three months ended March 31, 2003.
11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Pride International, Inc.:
We have reviewed the accompanying consolidated balance sheet of Pride
International, Inc. as of March 31, 2004, and the related consolidated statement
of operations and consolidated statement of cash flows for each of the three
month periods ended March 31, 2004 and 2003. These interim financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2003, and the related consolidated statements of operations, of
stockholders' equity, and of cash flows for the year then ended (not presented
herein) and in our report dated March 11, 2004, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2003 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Houston, Texas
May 10, 2004
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the accompanying unaudited consolidated financial statements as of March 31,
2004 and for the three months ended March 31, 2004 and 2003 included elsewhere
herein, and with our Annual Report on Form 10-K for the year ended December 31,
2003. The following information contains forward-looking statements. Please read
"Forward-Looking Statements" below for a discussion of certain limitations
inherent in such statements. Please also read "Risk Factors" in Item 1 of our
annual report for a discussion of certain risks facing our company.
OVERVIEW
We provide contract drilling and related services to oil and gas companies
worldwide, operating both offshore and on land. As of May 1, 2004, we operated a
global fleet of 327 rigs, including two ultra-deepwater drillships, 11
semisubmersible rigs, 35 jackup rigs, 30 tender-assisted, barge and platform
rigs and 249 land-based drilling and workover rigs. We operate in more than 30
countries and marine provinces. In January 2004, we reorganized our operating
segments to achieve a more rational geographic distribution and to establish
better defined lines of accountability and responsibility for the sectors of our
business. We now have six principal operating segments: Eastern Hemisphere,
which comprises our offshore and land drilling activity in Europe, Africa, the
Middle East, Southeast Asia, Russia and the Commonwealth of Independent States;
Western Hemisphere, which comprises our offshore drilling activity in Latin
America, currently Brazil, Mexico and Venezuela; U.S. Gulf of Mexico, which
comprises our U.S. offshore platform and jackup rig fleets; Latin America Land;
E&P Services; and Technical Services.
The markets for our drilling, workover and related E&P services are highly
cyclical. Variations in market conditions during the cycle impact us in
different ways depending primarily on the length of drilling contracts in
different regions. Contracts in the U.S. Gulf of Mexico, for example, tend to be
short-term, so a deterioration or improvement in market conditions tends to
impact our operations quickly. Contracts in our Eastern and Western Hemisphere
segments tend to be longer term. Accordingly, short-term changes in market
conditions may have little or no impact on our revenues and cash flows from
those operations unless the market changes occur during a period when we are
attempting to renew a number of those contracts.
During the first quarter of 2004, we recorded provisions for losses of
$21.3 million related to the construction of deepwater platform rigs on behalf
of two major oil company customers under lump-sum contracts.
Debt reduction and liquidity in 2004 will be positively impacted if we
succeed in our efforts to reduce operating, general and administrative costs,
further improve our working capital management and sell certain assets. Although
we intend to aggressively pursue these strategies to reduce our debt and improve
our liquidity, it is not practicable at the present time to quantify the
possible impact, if any, of any of these measures. As of May 3, 2004, our
liquidity position totaled approximately $161 million, up from $108 million as
of March 10, 2004, consisting of approximately $49 million of unrestricted cash,
$83 million of available undrawn capacity under our senior secured revolving
credit facilities and $29 million of available undrawn unsecured credit
facilities.
Debt levels and liquidity in 2004 will be negatively impacted by our 30%
share of stacking and debt service costs if we are unable to secure work during
2004 for the Pride Rio de Janeiro and Pride Portland, two Amethyst-class
semisubmersible rigs that are concluding construction and are expected to be
available for work at the end of the second quarter and third quarter of 2004,
respectively. In addition, the day rate under which our West African deepwater
semisubmersible rig Pride North America, whose existing contract expires in
2004, is recontracted could have an impact on our future debt and liquidity.
However, we expect debt and liquidity in the remainder of 2004 to benefit from a
full year of operations for our rigs in Mexico and from a reduced level of
capital expenditures, as our program to upgrade rigs from our U.S. Gulf of
Mexico fleet for international markets winds down.
Following the extension of the contracts for our two drillships by an
aggregate of 10 years in December 2003, we completed a $129.0 million expansion
of our drillship loan facilities in April 2004. $106.3 million of the increased
amount was drawn down and $22.7 million is available. The funds drawn down,
together with $15.2 million of previously restricted cash, were used by the
joint venture to repay $108.0 million of indebtedness due by the joint venture
company to us and the balance of the proceeds were used by the joint venture to
pay arrangement fees associated with the facility increase and to repay
indebtedness to our joint venture partner. The funds paid to us were used to
reduce our other outstanding debt and improve liquidity.
13
SEGMENT REVIEW
Eastern Hemisphere
Our Eastern Hemisphere segment currently comprises two drillships, three
semisubmersible rigs, eight jackup rigs, six tender assisted and barge rigs, 21
land rigs and two rigs managed for other parties.
In the first quarter of 2004, we maintained essentially full utilization of
our two drillships and two high-specification deepwater semisubmersibles
operating in West Africa as well as our mid-water depth semisubmersible working
in the Mediterranean Sea. During the quarter, we succeeded in obtaining a new
six-month contract for the Pride South Pacific, one of our deepwater
semisubmersible rigs working in the West African market. That contract commenced
upon completion of the previous contract in April 2004. The contract day rate is
approximately $35,000 per day less than the previous contract day rate. This
rate reduction reflects the current weakness in the West African deepwater
semisubmersible and drillship markets. We expect the Pride North America
deepwater semisubmersible rig, which is also working in the West African market,
to continue working for the remainder of the year when its existing contract
expires in August 2004. We expect that the day rate upon renewal will be
significantly lower than the current day rate. We believe, however, that
conditions in those markets will improve in 2005 as development drilling
commences on a number of major oil discoveries.
Our two deepwater drillships, the Pride Africa and Pride Angola, are
working under contracts that were extended in December 2003 by an aggregate of
ten years, commencing at the end of the contracts' current terms in June 2005
and May 2005, respectively. The Pride Africa is scheduled to undergo its
five-year special periodic survey in the fourth quarter of 2004 and is expected
to be out of service for approximately 45 days.
Since the transfer of two independent-leg jackup rigs to Nigeria and India
under two-year contracts in 2002, we have had eight jackup rigs working in our
Eastern Hemisphere region. All of these rigs are currently working under
long-term contracts, of which five are due to expire in 2004. The Pride
Pennsylvania underwent its special periodic survey and was off contract day rate
for 80 days during the first quarter and an additional 12 days at the start of
the second quarter of 2004. Three additional jackup rigs are scheduled to
undergo their planned special periodic surveys during the remainder of 2004 and
will be out of service for a combined total of approximately five months. We
expect that the five rigs whose contracts are due to expire in 2004 will be
recontracted at modestly lower day rates.
In Kazakhstan, we have two large land rigs that are operating on an
artificial island in the Caspian Sea. Both of the rigs were stacked at the onset
of the winter period in November 2003 and earned a standby rate until they were
reactivated in mid-March. One of the rigs is expected to work throughout the
2004 drilling season and is then expected to be stacked until spring 2005. The
second rig is currently completing the testing of the well it drilled in 2003,
which is expected to be completed in June 2004. We are exploring alternatives
for this rig after this date.
We expect revenues and gross margin for our Eastern Hemisphere segment
to be lower in 2004 than in 2003 primarily due to the weaker market conditions
in the West African deepwater semisubmersible market and to the Pride Africa
undergoing its special periodic survey.
Western Hemisphere
We currently have seven semisubmersible rigs, 14 jackup rigs, three
platform rigs, two lake barge rigs and two managed rigs in our Western
Hemisphere segment.
Activity offshore Mexico increased in the first quarter of 2004 due to a
full quarter's activity for the Pride Mexico semisubmersible rig and the Pride
Arkansas and Pride Texas jackup rigs, which commenced activity in the fourth
quarter of 2003. Additionally, the Pride South Atlantic semisubmersible rig,
which had been idle in the fourth quarter of 2003, commenced a new contract in
mid-January 2004 that is expected to continue through August 2004. We are
actively marketing this rig for further work thereafter.
The Pride Venezuela was warm stacked in Trinidad throughout the first
quarter of 2004. The current market for intermediate water-depth semisubmersible
rigs is extremely weak and, while we are bidding the rig to a number of
14
operators in the region for work in the latter half of 2004, there is no
assurance that we will be able to secure work for this rig given the competition
in this sector.
Gross margins in our Western Hemisphere segment for the first quarter of
2004, as compared with the corresponding period in 2003, were negatively
affected by higher downtime of our high-specification semisubmersible rigs
working offshore Brazil, the expiration of the high-margin contract for the
Pride Venezuela and an increase in costs in Mexico due to an increased number of
expatriates on our rigs. Revenues and gross margins from our Western Hemisphere
operations for all of 2004 are expected to exceed those for 2003 due to the
impact of a full period of activity in Mexico for rigs transferred from our U.S.
rig fleet during 2003 and reduced downtime for our semisubmersible rigs in
Brazil. In addition, the timing and terms under which the Pride Venezuela and
the two deepwater semisubmersible rigs nearing completion, the Pride Rio de
Janeiro and the Pride Portland, are contracted could have a significant impact
on our results.
U.S. Gulf of Mexico
Our rig fleet in the U.S. Gulf of Mexico currently comprises 11 jackup rigs
and 18 platform rigs.
During the first quarter of 2004, demand for drilling services in the U.S.
Gulf of Mexico continued the slow improvement seen in 2003. Market conditions
have improved due to the reduction in the supply of rigs resulting from a number
of rigs leaving the U.S. sector of the Gulf of Mexico for other markets. During
the first quarter of 2004, we had six jackups working in the U.S. Gulf of Mexico
with an average daily revenue of approximately $28,000 as compared with an
average of $22,000 for the prior year first quarter. We currently have a seventh
jackup, the Pride Arizona, in the U.S. Gulf of Mexico, which has received a one
year contract expected to commence in June 2004. We expect to maintain activity
for these seven rigs during the remainder of 2004.
Revenues from our platform rigs increased by approximately $2.8 million in
the first quarter of 2004, as compared with the fourth quarter of 2003, due to
higher rates on two of our platform rigs that moved from standby rates to full
day rates and also to an increase of fees on another platform rig.
We currently expect to have seven of our platform rigs working throughout
the year. Additionally, we expect operations to commence on two deepwater
platform rigs in July and August 2004, respectively. We are in the final stages
of constructing these rigs through our Technical Services segment, and once
commissioned and installed, we will commence long-term contracts for their
operation and maintenance on behalf of our client.
We expect that revenues and gross margins derived from our U.S. Gulf of
Mexico fleet will continue to improve during the remainder of 2004 due to the
commencement of operations with additional rigs.
Latin America Land
The Latin America land segment currently comprises 228 land drilling and
workover rigs operating in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico
and Venezuela.
During the first quarter of 2004, we experienced increased land drilling
activity in Argentina and Venezuela, where our active rig fleets increased by
three rigs to 136 rigs and two rigs to 27 rigs, respectively, as compared to the
fourth quarter of 2003. We experienced a combined reduction of four active rigs
in Colombia and Bolivia, of which two have now been moved from Bolivia to
Argentina.
Gross margins in Argentina improved from the fourth quarter of 2003 to the
first quarter of 2004 due to higher utilization and lower operating costs. This
was partially offset by a reduction in activity in Colombia and Bolivia. The
outlook for our Latin America Land segment looks positive for the remainder of
2004. We expect to maintain high levels of activity in Argentina, Venezuela and
Colombia, which we expect will offset a reduction of activity in Ecuador and
Bolivia.
E&P Services
Our E&P Services division currently operates in eight countries in Latin
America and provides cementing, stimulation, carbon dioxide, coiled tubing and
production services in addition to directional and under-balanced drilling. We
are also providing integrated services in Argentina, Ecuador and Venezuela as
well as offshore services in Brazil, Venezuela and Mexico.
15
During the first quarter of 2004, business activity and revenues continued
to increase due to increased activity in Mexico and Brazil as well as to a high
level of integrated services work in Argentina. We anticipate that margins in
our E&P Services division will improve during the remainder of 2004 as the
business continues to expand.
Technical Services
Our technical services group entered into lump-sum contracts in 2001 and
2002 with two major international oil company customers to design, engineer,
manage construction of and commission four deepwater platform drilling rigs for
installation on spars and tension-leg platforms. We also are to provide drilling
operations management of the rigs once they have been installed on the
platforms. The first rig commenced operations in November 2003 and the other
rigs are expected to enter into service in late 2004 and early 2005. As
described in our Annual Report on Form 10-K for the year ended December 31,
2003, we recorded loss provisions of $98.4 million during 2003 relating to the
construction of these platform drilling rigs. During the first quarter of 2004,
we recorded additional loss provisions totaling $21.3 million relating to the
construction of the rigs. We do not currently intend to enter into any
additional lump-sum construction contracts for rigs to be owned by others.
The construction losses recorded in the first quarter of 2004 are
principally attributable to additional provisions for higher commissioning costs
for the rigs, the costs of settling certain commercial disputes with equipment
vendors and sub-contractors and revised estimates for other cost items. The
provisions reflect our current estimates of the costs to complete the projects
and of additional contract revenues from the projects, following a review by our
operating and senior management.
Our technical services segment is performing these deepwater platform rig
construction projects under lump sum contracts with our customers. In pricing
these contracts, we attempted to accurately estimate our cost to perform the
work, including the cost of labor, material and services. Despite these efforts,
however, the revenue, cost and gross profit or loss we now expect to realize on
these lump-sum contracts vary from the originally estimated amounts. We have
experienced cost overruns on these contracts that have adversely impacted our
financial results. Currently unforeseen events may result in further cost
overruns to complete these projects, which could be material and which would
require us to record additional loss provisions in future periods. Such events
could include variations in labor and equipment productivity over the remaining
term of the contract, unanticipated cost increases, engineering changes,
shipyard or systems problems, project management issues, shortages of equipment,
materials or skilled labor, unscheduled delays in the delivery of ordered
materials and equipment, work stoppages, shipyard unavailability or delays.
We recognize revenues and related costs from our rig construction contracts
under the percentage-of-completion method of accounting using measurements of
progress toward completion appropriate for the work performed, such as
man-hours, costs incurred or physical progress. Accordingly, we review contract
price and cost estimates periodically as the work progresses and reflect
adjustments in income (1) to recognize income proportionate to the percentage of
completion in the case of projects showing an estimated profit at completion and
(2) to recognize the entire amount of the loss in the case of projects showing
an estimated loss at completion. To the extent these adjustments result in an
increase in previously reported losses or a reduction in or an elimination of
previously reported profits with respect to a project, we would recognize a
charge against current earnings, which could be material. Although we
continually strive to improve our ability to estimate our contract costs and
profitability associated with our construction projects, our current estimates
may be revised in future periods, and those revisions may be material.
Currently, all four of our lump-sum construction projects are in a loss
position.
Please read " -- Liquidity and Capital Resources" in this Item 2.
16
RESULTS OF OPERATIONS
The following table presents selected consolidated financial information by
operating segment for the periods indicated.
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2004 2003 (1)
----------------- -----------------
(IN MILLIONS, EXCEPT PERCENTAGES)
Revenues:
Eastern Hemisphere .................................. $ 143.0 33.0% $ 142.2 36.0%
Western Hemisphere .................................. 109.2 25.2 85.3 21.5
U.S. Gulf of Mexico ................................. 27.0 6.2 18.2 4.6
Latin America Land ................................. 89.0 20.5 73.1 18.5
E&P services ........................................ 34.2 7.9 24.6 6.2
Technical services .................................. 31.2 7.2 52.0 13.2
-------- ----- -------- -----
Total .......................................... 433.6 100.0 395.4 100.0
-------- ----- -------- -----
Cost of Services and Sales, excluding depreciation
and amortization:
Eastern Hemisphere .................................. 75.5 24.3 72.6 28.0
Western Hemisphere .................................. 66.5 21.4 42.8 16.5
U.S. Gulf of Mexico ................................. 23.4 7.5 22.9 8.8
Latin America Land .................................. 67.7 21.8 50.7 19.5
E&P services ........................................ 25.1 8.1 18.1 7.0
Technical services .................................. 52.3 16.9 52.4 20.2
-------- ----- -------- -----
Total .......................................... 310.5 100.0 259.5 100.0
-------- ----- -------- -----
Segment Profit (Loss), excluding depreciation
and amortization:
Eastern Hemisphere .................................. 67.5 54.8 69.6 51.2
Western Hemisphere .................................. 42.7 34.7 42.5 31.3
U.S. Gulf of Mexico ................................. 3.6 2.9 (4.7) (3.5)
Latin America Land .................................. 21.3 17.3 22.4 16.5
E&P services ........................................ 9.1 7.4 6.5 4.8
Technical services .................................. (21.1) (17.1) (0.4) (0.3)
Depreciation and amortization ....................... 66.3 61.7
General and administrative, excluding depreciation
and amortization ................................... 27.0 23.8
-------- --------
Earnings from operations ............................ $ 29.8 $ 50.4
======== ========
(1) The consolidated financial information by operating segment for the three
months ended March 31, 2003 has been restated to reflect our new operating
segments and to reflect the retroactive adoption of FIN No. 46R,
"Consolidation of Variable Interest Entities."
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Revenues. Revenues for the three months ended March 31, 2004 were $38.2
million, or 9.6%, higher than in the corresponding period in 2003, due primarily
to increased activity for our offshore rigs in Mexico, an increase in day rates
and activity in the U.S. Gulf of Mexico and an increase in land drilling and E&P
services activity in Argentina and Venezuela. These increases in revenues were
partially offset by a reduction in revenues recognized related to the design,
engineering and construction of deepwater platform rigs by our technical
services group following the completion of the first of four such rigs, the
Kizomba A, in the fourth quarter of 2003.
Costs of Services and Sales. Costs of services and sales for the three
months ended March 31, 2004 were $51.0 million, or 19.6%, higher than in the
corresponding period in 2003 due primarily to increased costs associated with
rigs that operated in Mexico and Latin America during 2004 that were stacked or
being upgraded during 2003. Additionally, costs of services and sales increased
due to the effect that a weakening of the U.S. dollar compared with the
Argentine peso and the euro
17
had on expenses denominated in those foreign currencies. Costs of services and
sales in our technical services segment were substantially the same between the
first quarter of 2003 and 2004, despite the reduction in the number of ongoing
deepwater platform construction projects, due to the loss provisions of $21.3
million in respect of these projects in the 2004 quarter.
Depreciation and Amortization. Depreciation expense for the three months
ended March 31, 2004, was $4.6 million, or 7.4%, higher than in the three months
ended March 31, 2003, due principally to incremental depreciation on upgrades
for rigs relocated to Mexico and to other rig refurbishments and upgrades.
General and Administrative. General and administrative expenses increased
by $3.2 million, or 13.7%, in the three months ended March 31, 2004 as compared
to the three months ended March 31, 2003, due primarily to increased overhead
related to higher activity in Argentina and Venezuela, the impact of the decline
in the value of the U.S. dollar relative to the Argentine peso and the euro on
certain expenses denominated in those currencies and higher professional fees,
insurance and staffing costs.
Other Income (Expense). Other expense for the three months ended March 31,
2004 decreased by $6.1 million, or 16.2%, as compared to the corresponding
period in 2003. Interest expense decreased by $4.1 million due principally to a
reduction in the weighted average interest rate of our debt as a result of
recent debt refinancings. Other expense, net in the quarter ended March 31, 2004
consisted mostly of net foreign exchange losses, primarily in Venezuela. Other
expense, net in the corresponding period in 2003 principally consisted of net
foreign exchange losses on our euro and Venezuelan bolivar denominated net
monetary assets.
Income Tax Provision. Our consolidated effective income tax rate for the
three months ended March 31, 2004 was 55.0% as compared to 27.4% for the
corresponding period in 2003. The higher rate for 2004 is principally the result
of an increase in expected taxable income for 2004 in high effective tax rate
countries in Latin America, lower net income in foreign jurisdictions with low
or zero effective tax rates and income taxes in deemed profit jurisdictions
despite low or minimal earnings in such jurisdictions.
Minority Interest. Minority interest in the three months ended March 31,
2004 increased $0.7 million, or 12.8%, as compared to the three months ended
March 31, 2003, primarily due to the commencement of operations of the Kizomba A
deepwater platform rig. That rig is being operated by our Angolan joint venture
in West Africa in which we have a 51% interest.
LIQUIDITY AND CAPITAL RESOURCES
We had net working capital of $30.4 million and $83.1 million as of March
31, 2004 and December 31, 2003, respectively. The decrease in net working
capital was attributable primarily to the use of cash to repay debt and to net
cash outlays on rig construction projects during the quarter ended March 31,
2004 of approximately $43 million.
Rig Construction Projects
We currently expect cash outflows after March 31, 2004 to complete our rig
construction projects to approximate our cash inflows on those projects.
Capital Expenditures
Additions to property and equipment during the three months ended March 31,
2004 totaled $31.0 million and primarily related to sustaining capital projects.
Capital expenditures for the remainder of 2004 are currently expected to total
approximately $100 million.
18
Credit Facilities
We have senior credit facilities with a group of banks providing for
aggregate availability of up to $447.0 million, consisting of a $197.0 million
term loan maturing in January 2009 and a $250.0 million revolving credit
facility maturing in January 2007. Borrowings under the revolving credit
facility are available for general corporate purposes. We may issue up to $50.0
million of letters of credit under the facility. As of March 31, 2004, $125.0
million of borrowings and an additional $4.8 million of letters of credit were
outstanding under the revolving credit facility. Borrowings under the facilities
currently bear interest at variable rates based on LIBOR plus a spread based on
the credit rating of the facility or, if unrated, index debt. As of March 31,
2004, the interest rates on the term loan and revolving credit facility were
3.66% and 3.08%, respectively.
We also have a senior secured revolving credit facility with non-U.S. banks
that provides aggregate availability of up to $180.0 million, including up to
$10.0 million of letters of credit. Borrowings under the credit facility bear
interest at variable rates based on LIBOR plus a spread ranging from 1.2% to
2.1%. As of March 31, 2004, $129.0 million of borrowings and an additional $9.6
million of letters of credit were outstanding under this credit facility, and
the interest rate was 2.87%.
As of May 3, 2004, the undrawn portion of our senior secured revolving
credit facilities was approximately $196.0 million. Indentures governing our
outstanding 9 3/8% senior notes due 2007 and our 10% senior notes due 2009 limit
our ability to draw under these facilities to a percentage of consolidated net
tangible assets, which, as of May 3, 2004, effectively restricted our ability to
borrow approximately $113.0 million of undrawn capacity under these facilities.
Accordingly, only $83.0 million of these facilities were available to meet our
short-term liquidity needs.
Drillship Loans
Following the extension of the contracts for our two drillships by an
aggregate of 10 years in December 2003, we completed a $129.0 million expansion
of our drillship loan facilities in April 2004. $106.3 million of the increased
amount was drawn down and $22.7 million is available. The funds drawn down,
together with $15.2 million of previously restricted cash, were used by the
joint venture to repay $108.0 million of indebtedness due by the joint venture
company to us and the balance of the proceeds were used by the joint venture to
pay arrangement fees associated with the facility increase and to repay
indebtedness to our joint venture partner. The funds paid to us were used to
reduce our other outstanding debt and improve liquidity.
Contractual Obligations
As of March 31, 2004, we had approximately $4.3 billion in total assets and
$1.9 billion of long-term debt and capital lease obligations. Although we do not
expect that our level of total indebtedness will have a material adverse impact
on our financial position, results of operations or liquidity in future periods,
it may limit our flexibility in certain areas. Please read "Risk Factors -- We
may be considered highly leveraged. Our significant debt levels and debt
agreement restrictions may limit our liquidity and flexibility in obtaining
additional financing and in pursuing other business opportunities" in Item 1 of
our Annual Report on Form 10-K for the year ended December 31, 2003.
For additional information about our contractual obligations as of December
31, 2003, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Contractual
Obligations" in Item 7 of our annual report. There have been no material changes
to such disclosure regarding our contractual obligations made in the annual
report.
Investment in Joint Venture
We own a 30.0% equity interest in a joint venture company that is currently
completing construction of two dynamically-positioned, deepwater semisubmersible
drilling rigs, the Pride Portland and the Pride Rio de Janeiro. The Pride Rio de
Janeiro is undergoing final commissioning in Brazil, and the Pride Portland is
expected to leave the shipyard in Maine in May 2004. The joint venture company
has financed 87.5% of the cost of construction of these rigs through fixed rate
notes, with repayment of the notes guaranteed by the United States Maritime
Administration ("MARAD"). The notes are non-recourse to any of the joint venture
owners, except that, in order to make available an additional $21.9 million
under the MARAD-guaranteed notes to fund the project through the sea and
drilling trial stage for each rig, we
19
have provided:
- a $25.0 million letter of credit to secure principal and interest
payments due under the notes, the payment of costs of removing or
contesting liens on the rigs and the payment of debt of the joint
venture company to MARAD in the event MARAD's guarantee is drawn;
- a guarantee of any cash in excess of the additional $21.9 million
required to get the rigs through the sea and drilling trial stage and
obtain their class certificates; and
- a guarantee of the direct costs of the voyage of each rig from any
foreign jurisdiction in which it is located to a U.S. Gulf port
nominated by MARAD in the event of a default prior to the rig obtaining
a charter of at least three years in form and substance satisfactory to
MARAD and at a rate sufficient to pay operating costs and debt service.
Our joint venture partner has agreed to reimburse us its proportionate share of
any draws under the letter of credit or payments under the guarantees. To secure
those reimbursements, we have set-off rights against, and rights to keep as
collateral any payments on, the $85.9 million of our convertible senior notes
held by the joint venture partner. We currently expect that funds in excess of
the additional $21.9 million will not be required to get the rigs through the
sea and drilling trial stage and obtain their class certificates. Additional
funds may, however, be required. Any additional funding is expected to be made
by additional capital contributions by the joint venture partners.
The 12.5% of the cost of construction not funded under the MARAD-guaranteed
notes is being provided by the joint venture company from equity contributions
that have been made by the joint venture partners. In addition, the joint
venture partners have provided equity contributions to finance all of the
estimated $5.2 million of incremental costs associated with upgrading both rigs
to a water depth capability of 1,700 meters from the original design of
approximately 1,500 meters, of which our 30% share is approximately $1.6
million. Through March 31, 2004, our equity contributions to the joint venture
totaled $35.5 million, including capitalized interest of $7.6 million and the
contributions of $1.6 million in connection with the water depth upgrades.
The Pride Portland and Pride Rio de Janeiro are being built to operate
under long-term contracts with Petrobras; however, Petrobras has given notice of
cancellation of those contracts for late delivery. Based on current demand for
deepwater drilling rigs, we believe that Petrobras or another customer will
employ the Pride Portland and Pride Rio de Janeiro under new or amended
contracts. There can be no assurance, however, that either the Pride Portland or
the Pride Rio de Janeiro will be contracted to Petrobras or to any other
customer. If no contract is obtained before the rigs are commissioned, the rigs
will be stacked. In this case, the joint venture partners would need to advance
further funds to the joint venture company to allow it to pay stacking costs
(estimated to be approximately $1 million per month per rig) as well as
principal and interest payments on the debt as they become due since the joint
venture company would have no alternative source of funds to allow it to make
such payments. Initial interest and debt service payments in respect of
construction debt for the two rigs are expected to total approximately $23.0
million during 2004, of which our 30% share would be $6.9 million. Our letter of
credit could be drawn for the full $23.0 million in debt service if not paid by
the joint venture company.
If the joint venture company failed to cover its debt service requirements,
a default would occur under the fixed rate notes guaranteed by MARAD. MARAD
would be entitled to foreclose on the mortgages related to the Pride Portland
and the Pride Rio de Janeiro and take possession of the two rigs.
Other Sources and Uses of Cash
As of March 31, 2004, $42.9 million of our cash balances, which amount is
included in restricted cash, consisted of funds held in trust in connection with
our drillship and semisubmersible loans and our limited-recourse collateralized
term loans and, accordingly, was not available for our use. We believe that the
cash and cash equivalents on hand, together with the cash generated from our
operations and borrowings under our credit facilities, will be adequate to fund
normal ongoing capital expenditures, working capital and debt service
requirements for the foreseeable future.
We may redeploy additional assets to more active regions in 2004 if we have
the opportunity to do so on attractive terms; however, we expect fewer
opportunities for redeployments than in 2002 and 2003. From time to time, we
have one or more bids outstanding for contracts that could require significant
capital expenditures and mobilization costs. We expect
20
to fund project opportunities primarily through a combination of working
capital, cash flow from operations and full or limited recourse debt or equity
financing. In addition, we may consider from time to time opportunities to
dispose of certain assets when we believe the capital could be more effectively
deployed to reduce debt or for other purposes, and we continue to discuss with
potential buyers the possible sale of certain assets.
In addition to the matters described in this " -- Liquidity and Capital
Resources" section, please read " -- Segment Results" for additional matters
that may have a material impact on our liquidity.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements, other than statements of
historical fact, included in this quarterly report that address activities,
events or developments that we expect, project, believe or anticipate will or
may occur in the future are forward-looking statements. These include such
matters as:
- market conditions, expansion and other development trends in the
contract drilling industry
- future utilization and contract rates for rigs
- future capital expenditures and investments in the construction,
acquisition and refurbishment of rigs (including the amount and nature
thereof and the timing of completion thereof)
- estimates of profit or loss and cash flows from performance of lump-sum
rig construction contracts
- future asset sales
- completion and employment of rigs under construction
- repayment of debt
- utilization of net operating loss carryforwards
- business strategies
- expansion and growth of operations
- future exposure to currency devaluations or exchange rate fluctuations
- expected outcomes of legal and administrative proceedings and their
expected effects on our financial position, results of operations and
cash flows
- future operating results and financial condition and
- the effectiveness of our disclosure controls and procedures and internal
control over financial reporting
We have based these statements on our assumptions and analyses in light of
our experience and perception of historical trends, current conditions, expected
future developments and other factors we believe are appropriate in the
circumstances. These statements are subject to a number of assumptions, risks
and uncertainties, including those described under "Risk Factors" in Item 1 of
our Annual Report on Form 10-K for the year ended December 31, 2003 and the
following:
- general economic business conditions
- prices of oil and gas and industry expectations about future prices
- cost overruns in our lump-sum construction and other turnkey contracts
21
- adjustments in estimates affecting our revenue recognition under
percentage-of-completion accounting
- foreign exchange controls and currency fluctuations
- political stability in the countries in which we operate
- the business opportunities (or lack thereof) that may be presented to
and pursued by us
- changes in laws or regulations
- the validity of the assumptions used in the design of our disclosure
controls and procedures and
- our ability to implement in a timely manner internal control procedures
necessary to allow our management to report on the effectiveness of our
internal control over financial reporting
Most of these factors are beyond our control. We caution you that
forward-looking statements are not guarantees of future performance and that
actual results or developments may differ materially from those projected in
these statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see
"Quantitative and Qualitative Disclosures about Market Risk" in Item 7A of our
Annual Report on Form 10-K for the year ended December 31, 2003. There have been
no material changes to the disclosure regarding our exposure to certain market
risks made in the annual report. For additional information regarding our
long-term debt, see Note 3 of the Notes to Unaudited Consolidated Financial
Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and our
Executive Vice President and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934 as of the end of the period covered by this
quarterly report. In the course of this evaluation, management considered
certain internal control areas in which we have made and are continuing to make
changes to improve and enhance controls. Based upon that evaluation, our Chief
Executive Officer and our Executive Vice President and Chief Financial Officer
concluded that our disclosure controls and procedures are effective, in all
material respects, with respect to the recording, processing, summarizing and
reporting, within the time periods specified in the SEC's rules and forms, of
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act.
Beginning with the year ending December 31, 2004, Section 404 of the
Sarbanes-Oxley Act of 2002 will require us to include an internal control report
of management with our annual report on Form 10-K. The internal control report
must contain (1) a statement of management's responsibility for establishing and
maintaining adequate internal control over financial reporting for our company,
(2) a statement identifying the framework used by management to conduct the
required evaluation of the effectiveness of our internal control over financial
reporting, (3) management's assessment of the effectiveness of our internal
control over financial reporting as of the end of our most recent fiscal year,
including a statement as to whether or not our internal control over financial
reporting is effective, and (4) a statement that our independent auditors have
issued an attestation report on management's assessment of our internal control
over financial reporting. In order to achieve compliance with Section 404 within
the prescribed period, management has formed an internal control steering
committee, engaged outside consultants and adopted a detailed project work plan
to assess the adequacy of our internal control over financial reporting,
remediate any control weaknesses that may be identified, validate through
testing that controls are functioning as documented and implement a continuous
reporting and improvement process for internal control over financial reporting.
As a result of this initiative, we may make changes in our internal control over
financial reporting from time to time during the period prior to December 31,
2004. As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2003, we made significant changes in our internal controls over financial
reporting in 2003 and through the date of that report. In addition to those
changes, we have appointed a new Vice President of Engineering and Technical
Services. There were no other changes in our internal control over financial
reporting that occurred during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits*
10.1 Employment/Non-Competition/Confidentiality Agreement dated March 23,
2004 between Pride and W. Gregory Looser
10.2 Employment/Non-Competition/Confidentiality Agreement dated March 15,
2004 between Pride and Imran Toufeeq
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter on unaudited interim financial information of
PricewaterhouseCoopers LLP
31.1 Certification of Chief Executive Officer of Pride pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer of Pride pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of the Chief Executive Officer and the Chief Financial
Officer of Pride pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
- -----------------
* Pride and its subsidiaries are parties to several debt instruments that
have not been filed with the SEC under which the total amount of
securities authorized does not exceed 10% of the total assets of Pride
and its subsidiaries on a consolidated basis. Pursuant to paragraph
4(iii) (A) of Item 601(b) of Regulation S-K, Pride agrees to furnish a
copy of such instruments to the SEC upon request.
(b) Reports on Form 8-K
In a Current Report on Form 8-K submitted to the SEC on January 9, 2004, we
filed pursuant to Item 5 and Item 7 of Form 8-K information regarding certain
organizational changes.
24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PRIDE INTERNATIONAL, INC.
By: /s/ Edward G. Brantley
------------------------------------
EDWARD G. BRANTLEY
VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
Date: May 10, 2004
25
EXHIBIT INDEX
EXHIBIT DESCRIPTION
10.1 Employment/Non-Competition/Confidentiality Agreement dated March 23,
2004 between Pride and W. Gregory Looser
10.2 Employment/Non-Competition/Confidentiality Agreement dated March 15,
2004 between Pride and Imran Toufeeq
12 Computation of Ratio of Earnings to Fixed Charges
15 Letter on unaudited interim financial information of
PricewaterhouseCoopers LLP
31.1 Certification of Chief Executive Officer of Pride pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer of Pride pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of the Chief Executive Officer and the Chief Financial
Officer of Pride pursuant to Section 906 of the Sarbanes-Oxley Act of
2002