Pride intends to use the proceeds from the senior unsecured offering and new credit facility to repay its existing credit facilities ($400 million) and redeem its outstanding 9.375% senior notes ($175 million), 10% senior notes ($200 million), and 9% convertible notes ($86 million). The consolidated net tangible asset covenants in Pride's 9.375% and 10% senior notes limited Pride's ability to borrow under the revolving credit facilities. These transactions will improve Pride's liquidity position.
The ratings reflect Pride's relatively weak credit profile, the regions where the company operates, and its competitive position in the oil and gas drilling market. A number of factors have contributed to Pride's weaker-than-expected credit profile, including problems with the technical services segment, persistent weakness in the shallow-water Gulf of Mexico, and a heavily leveraged balance sheet. Since mid-2003, the company has suffered from significant cost overruns on several new platform rig construction projects, including ExxonMobil's Kizomba A TLP in West Africa and BP's Holstein spar project in the U.S. Gulf of Mexico. In the latest twelve months (LTM) ended March 31, 2004, the technical service segment's operating losses approached $95 million. Additionally, Pride has significant exposure to the shallow waters of the Gulf of Mexico, a market that has been particularly weak recently. The total offshore rig count in that region has declined by about 50% since its peak in the spring of 2001 despite extremely strong commodity prices. Notably, to offset the weak environment in the Gulf of Mexico, Pride mobilized fourteen jackups and two semi-submersibles to Mexico, where activity is robust.
Also contributing to Pride's weak credit profile are the debt-funded capital expenditures used to finance new builds and upgrades to its fleet in the past five years. Development of the company's drillships, several Amethyst-class semi-submersibles, and refurbishments on nearly all of its other semi-submersible fleet has been funded primarily with debt. These factors contributed to Pride generating negative free cash flow for the sixth consecutive year in 2003. Pride's LTM EBITDA as of March 31, 2004, was $359 million, providing adjusted interest coverage of 2.2 times (x) and adjusted debt-to-EBITDA of 5.7x. At quarter's end, Pride had $84 million of cash on hand, of which $43 million was restricted. The company also had $162 million available through its credit facilities but was prevented from further borrowings under either facility due to the previously mentioned consolidated net tangible asset covenants. Subsequent to the refinancing of the senior unsecured notes, total debt and lease obligations will be nearly $2 billion.
Fitch has concerns with several regions where Pride has significant operations. In the intermediate term, Fitch is pessimistic about the prospects of shallow-water domestic drillers, given that demand in the shallow-water Gulf of Mexico has been limited despite strong cash flows from the upstream. This is evident by the weakness in the number of active jackups in the Gulf of Mexico. The focus of operators domestically has shifted to the deep-water Gulf of Mexico, where Pride's presence is limited. Additionally, Fitch has a cautious view of businesses operating in Argentina or Venezuela due to the political uncertainty in each country. Fitch currently has a sovereign rating of 'DDD' for Argentina and 'B-' for Venezuela.
Pride competes in the offshore drilling market and is a market leader in the South American land drilling and service segment. The company's commodity fleet of 33 jackup rigs is best suited for shallow waters, with 80% of its fleet designed to drill in less than 300 feet of water. Nearly all of its jackups are equipped to drill depths of up to 20,000 feet. Its fleet of floating deepwater units consists of ten semi-submersibles and two dynamically positioned drillships. Of these twelve vessels, only six are capable of drilling in water depths greater than 5,000 feet. The company also operates 21 platform rigs, five tender-assisted rigs, and three barge rigs. Pride's onshore fleet consists of 249 land rigs, the majority of which are workover rigs located in Argentina and Venezuela.
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