A Salomon Smith Barney report saying oil-driller Pride International's (Ba3/BB) all-stock acquisition of Marine Drilling "may result in an investment-grade rating for the new Pride International once the acquisition closes," is being met with skepticism by the buy- and sell-sides. Though many pros believe the acquisition will result in an upgrade because Marine Drilling has very little debt and the acquisition was conservatively financed, they do not see Pride climbing the full two or three notches to make the cut. Keith Petersen, the energy analyst at SSB who issued the report, referred calls to a firm SSB spokeswoman, who declined comment.
"I don't think this is an investment-grade company yet," says Adam Leight, high-yield energy analyst at Credit Suisse First Boston in New York. "It's still a very highly levered company," he said, pointing to Pride's over $1.6 billion in debt. Another market observer points to two oil-rigs under construction by a Pride partner that may require a significant investment. Leight believes Pride will need to do another equity-financed merger to reach investment grade. Moreover, other pros believe it could issue still more debt for any subsequent acquisition, thus affecting the rating upgrade picture.
Austin Ramzy, director of fixed-income research at Principal Capital in Des Moines, sees Pride falling short as well. He thinks ratings agencies are paying a lot of attention to oil and gas prices, which he expects to fall from their level of roughly $27.5 per barrel to the low $20s. As a result, he believes Pride's revenues will decline before it can reduce its debt load enough to warrant an investment-grade rating.
A call to Daniel Volpi, analyst for Standard & Poor's, was not returned. Andrew Oram, analyst for Moody's Investors Service, declined comment.