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Take Pride in This Driller
05/12/2008 12:00 am EST
Jon Markman, editor of Jon Markman’s Strategic Advantage, says a Houston-based driller should rack up strong earnings in the year ahead and it’s trading at a discount.
Oil and gas pick Pride International (NYSE: PDE), headquartered in Houston, Texas, is one of the world's largest drilling contractors, providing contract drilling and related services to oil and natural gas exploration and production companies worldwide.
Positioned in some of the world's exploration and production epicenters, PDE has a market presence in West Africa, Latin America, the Gulf of Mexico, the Mediterranean and the Middle East. The company operates a fleet of 64 rigs, including deep-water drillships, semisubmersible rigs, jack-ups, and platform rigs.
PDE is also constructing three ultra-deepwater drillships that will be capable of drilling to a total vertical depth of up to 40,000 feet in up to 10,000 feet of water. The rigs will be the most advanced ultra-deepwater drilling and completions units in the offshore industry.
Demand has really skyrocketed for this type of drilling in the last few years. Contracted day rates range from $200,000 to $500,000 a day versus the average of $50,000 to $150,000 for more common jack-up rigs, reflecting the high demand for deep-water projects and the low supply of available rigs.
Last week, the company released first quarter results, posting profits up 85% over the same quarter of 2007. The company attributed its first-quarter profit jump to an increase in the income from continuing operations, which rose to $136.1 million, or 77 cents per share, up from 42 cents last year, beating the consensus estimate by three pennies.
The meaty gain was helped by the company sale of 30% of its interest in an Eastern Hemisphere-based land drilling joint venture, but business, too, was up in a big way. Revenues jumped close to 20% to $557.4 million on contract day-rates and rig utilization rates that improved across the board.
PDE's shares were also boosted last week after the company announced that the last of its three ultra-deepwater drillships under construction was signed to a five-year contract with a subsidiary of British energy giant BP (NYSE: BP). The three new vessels will be completed in 2010, and the long-term contracts for all three will bring in $3 billion in additional revenues for PDE through 2015. PDE shed about a third of its debt in 2007, and its debt to equity ratio is down to 0.26, versus an industry average of 0.44.
Earnings are expected to jump more than 50% by next year, and PDE's shares are trading cheaply with a price-to-earnings multiple of 16x versus the industry average multiple of 23x. With earnings per share expected to come in at $3.80 in December, this gives us a price target of around $54 for six months. Shares are trading around $44.50 now.
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