Salomon analyst says buy Pride International 0% convertible due 2018

By Ronda Fears

Nashville, Tenn., March 1 - Salomon Smith Barney analyst Stuart Novick said investors should buy the Pride International Inc. 0% convertible due 2018, given the issue's yield advantage over the Pride 0% convert due 2021. Also, Novick said that investors who see Pride as a takeover target in the oil and gas drilling sector might want to consider the new Pride 2.5% convert due 2007 as it offers more equity participation than either 0% issue.

"We presently prefer Pride's zeros of 2018 versus the other two converts. The '18s seem more appealing than the zeros of 2021 given their approximately 310 basis point yield to put advantage over the 21s. In our view, that size differential is unwarranted," Novick said in a report Friday.

The rationale for such a spread, he said, is that there is a three-month later put date for the '18s and is payable in cash or stock at the company's option for the '18s versus cash only for the '21s, plus the '18s are subordinate in the capital structure whereas the '21s are senior bonds. The '18s are putable in April 2003 and the '21s in January 2003. In any event, the analyst said the matter is less relevant following the infusion of $250 million from Pride's new 2.5% converts this week.

The new issue boosted cash and financial flexibility, particularly regarding the upcoming pair of puts next year, and Pride said when issuing the new deal that some of the proceeds would be used to retire some of the two 0% converts ahead of the put dates. The company already has bought back $60 million (accreted value) of the two issues zeros, leaving $446 million (accreted value) outstanding.

"As for the new bonds, that issue clearly possesses the most juice should Pride move higher. The bonds should return more than 50% as much as the common given a 25% advance in the shares over a one year time frame," Novick said in the report.

"While we continue to like Pride as a long term means by which investors can ultimately benefit from rising commodity prices, we do not see that scenario playing out in the immediate future. Thus our lukewarm assessment of the new converts for now."

However, the analyst said investors may also want to consider the takeover angle. With a market cap of less than $1.8 billion, Pride is trading right around its book value. That 1x multiple is below those of other big drillers like Nabors (2.7x), Global Santa Fe (1.7x) and Diamond Offshore (2.1x). While the 0% convertible issues are putable at their accreted value in the event of a change in control, assuming a significant takeover premium, Novick said investors might fare best with the 2.5s considering their high degree of theoretical equity participation.

In support of not expecting the Pride situation to turnaround in the immediate future, the analyst noted that ongoing weakness in the Gulf of Mexico, along with economic uncertainty in Venezuela and Argentina will probably depress results for Pride this year. On the heels of a weak fourth quarter with earnings of 9c per share, he noted that Salomon is estimating EPS of just 30c this year, versus 91c in the year just ended. He added, however, that the firm is keeping a buy rating on the stock, given its relatively low valuation and upside earnings leverage to an improvement in natural gas prices.

Pride 0% of 2018 (Ba3/BB-)

Convertible Price: 45.03

Common Price: $13.00

Current Yield: 0.00%

Yield-to-maturity: 5.00%

Yield-to-put: 8.33%

Conversion Premium: 151.10%

Investment Premium: 1. 20%

Conversion Price: $28.35

Conversion Ratio: 13.794

Next Call : 4/24/03 at 49.452

Next Put: 4/24/03 at 49.452

Fair Value: 45.42%

Delta: 3.9%

Spread (bps): 550

Investment Value: 45. 32

Option Value: 0.10%

Volatility: 45.0%

Issue Size: $511.4 million

Equity Mkt Cap: $1.738 billion

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