What the industry expects in 2007

Wanted: A few (lot of) good people

Robert E. Warren, Vice President, Pride International, Inc., Houston

Borrowed words from a favorite Marine Corps slogan help define an energy industry in a people crisis. Contrary to many industry players’ opinions, the anxiously awaited end of the cycle did not occur during 2006. Nor is it expected in 2007 or 2008. Indeed, much of the offshore drilling capacity is committed through 2008-2009 for nearly all classes of assets. A similar forecast exists for land rigs, which tend to operate on shorter-term contracts.

No question, we’ve seen jackup day rates soften in the US Gulf of Mexico, due to hurricane effects, lower natural gas prices (which bottomed somewhere near the $4/Mcf range), and short-term drilling projects taken by jackups waiting to mobilize from the Gulf to foreign destinations. Cap that with many operators consuming their 2006 budgets early and then waiting on the sidelines until 2007, which already has the makings of a very busy drilling year.

International locations remain the destination of choice for US-based offshore units, as better opportunities with longer-term agreements and higher day rates draw higher-specification jackups from the US Gulf of Mexico (GOM). We believe this trend will continue well into 2007. As of this writing, about 15 to 20 of our competitors’ units will depart the Gulf through the next six to 12 months for stronger markets in the Middle East, West Africa and Southeast Asia. And there is evidence that more will follow until contracting conditions in the GOM improve to international standards, hurricane frequency declines, and windstorm insurance coverage becomes affordable again.

New direction. Pride International is expected to complete 2006 with its best financial results in history, and we consider 2007 a probable improvement over 2006. Offshore, the contracted rates for many of our older jackups and floaters acquired through acquisitions from the late 1990s lagged our peers’ similarly classed units, due to commitments on previously set, long-term contracts.

Those assets, primarily mat jackups, were re-priced from late 2005 and are expected to carry us to new earnings levels in 2006 with some 50% of our operating income generated by that class. Certain floaters and remaining jackups, that are re-pricing in 2006-2007, will also move into new rate territory, doubling or tripling (or more), their previous rate structures. Just as importantly, contracts negotiated since late last year have been secured without the more onerous liabilities previously carried by the contractor, providing better balance in sharing exposure for construction of the well.

As the robust market continues, we expect our overall rate structure to improve dramatically over the next three years, as our contracted assets farthest out – two drillships and two remaining floaters – re-price at or close to leading-edge day rates. To be sure, some of our shipyard time in 2006 exceeded the plan, including two jackups that became unscheduled life enhancement projects. However, we believe now is the time to make improvements to a fleet scheduled for long-term operation.

To an offshore focus. Meanwhile, Pride International is pursuing the divestiture of our Latin American land business and the E&P Services segment, known as San Antonio Servicios Especiales. While both are solid contributors to earnings, the company has turned strategically to deepwater growth and future expansion taking the form of floaters and higher-specification jackups. This plan is already evidenced by the acquisition in December 2005 of an additional 40% interest in our two Angolan drillships, bringing ownership to 91%. This was followed by the acquisition of the remaining 70% of our Brazilian joint venture in November, 2006. This effort provides full ownership of two newbuild semisubmersibles that were mobilized to Brazil in 2004. With the forecast expansion of deepwater requirements, these units are candidates for much improved operating rates.

By the end of 2007, all but one of our remaining offshore fleet – 11 jackups and three semis – will have gone through the shipyard for survey, maintenance and heavy repair, where necessary. With that, our offshore units are not expected in the shipyard for major maintenance, refurbishments or repairs for the next several years, barring unexpected incidents, with the exception of the required five-year Special Periodic Survey (SPS) for floaters.

Where’s the beef? So, if the markets are the strongest in history, and utilization continues to be sustained at the highest level longer than ever recorded, and if consensus remains accurate that the momentum for deepwater and other offshore requirements is moving inexplicably forward, we should be excited, right? And if we as a company, and we as an industry, are better positioned than at any time in the past to grow at an attractive rate of return (and we really believe that it is), then the future should be bright, right? Well, probably.

Because we’re sitting on a ticking time bomb of qualified personnel shortages that could hamper development and create safety implications at the drill floor, the pumping unit and the manufacturing facility, if inexperienced workers are rushed into the industry as they were in past decades when we uttered the “boom” word. Afterward, we lamented the rise and fall of oilfield careers as the boom-to-bust cycles took their toll. This time, there’s a new deck and it’s missing a lot of cards.

Opportunities are enormous, but how are we, as an industry, attracting the younger generation with the right stuff? Hiring from competitors and contractors (yes, some of our clients have hired from our ranks, too) works for the short term, but attracting and retaining a higher-quality person remains the greatest single challenge we face today, and for the next five years. Slow product delivery is a problem, shipyard requirements continue, and technical issues remain to be solved, but building the organization of tomorrow that provides quality service and product – now there’s the crisis.

We at Pride International are committed to the safety and development of our people, and success will be determined by our ability to attract and retain individuals with the same commitment that we have at every level of the organization. We are all engaged in recruiting at some level, on some basis. Our Human Resources group and training managers are working hard to not only recruit and develop for existing openings, but to identify and hire young workers and leaders who will take the baton into the future.

Some of those are already in our organization, moving up through accelerated development programs, internships and work study programs. Future candidates are still in our universities, the military (an excellent source of disciplined, responsible workers) trade schools, and the national labor force available to our operations in international locations. We’ve identified many of our future leaders, but we still need more.

Can we do more? We had better, and accelerate the effort, too, because most people say we’re already late, and the train’s almost left the station. Our industry has done an abysmal job persuading society and the younger generation that we’re a worthy career destination (to wit, the bumper sticker: “Please don’t tell my Mother I work in the oilfield – she still thinks I play the piano in a ___house”). How we communicate and recruit for this remarkable opportunity to join one of the most challenging livelihoods on the planet will define us as an industry much sooner than you think . . . and it will impact our nation, and our way of life. It’s that simple and that critical.

THE AUTHOR
	Robert E. (Bob) Warren is vice president of Investor Relations at Pride International, Inc., responsible for the company’s interface with the investment community. During his 15 years with Pride, he has served as vice president of Russian Operations and vice president of Marketing & Communications, together with his present role. He has managed drilling operations in Iran, Libya, the UAE and Pakistan. Mr. Warren holds a BS degree in petroleum engineering from Texas Tech University and an MBA degree from the University of Texas. He encourages the reader to learn more about Pride International and risk the company faces in its SEC filings.