PREVIEW-Pride's deepwater drilling outlook seen bullish

* What: Pride International Q3 results

* When: Oct. 29

* Good contract coverage to help Q3, margins watched

* Investors to focus on deepwater outlook

By Arup Roychoudhury and Adveith Nair

BANGALORE, Oct 28 (Reuters) - Pride International Inc's (PDE.N) lucrative deepwater drilling business would be keenly watched when the drilling services provider reports its quarterly earnings on Oct. 29.

Pride's third-quarter results are expected to benefit from improved contract coverage for its rigs, and the company is also likely to give a bullish outlook on its deepwater activity.

"The key for the market, is not necessarily how the quarter shapes up, but the commentary over deepwater. I think Pride will be more bullish on the outlook for deepwater than they have been, given the recent pick up in deepwater bidding activity," Barclays Capital analyst James West said.

In the second quarter, revenue from Pride's eight deepwater semisubmersibles and drillships was up 7 percent sequentially at $234.8 million, which was about half of its overall revenue.

West said ultra-deepwater dayrates for Pride had probably bottomed now, could be flat for a quarter or two, and might pick up at some point during 2010.

Deepwater rigs, though costlier to build, guarantee a higher and steadier stream of revenue than jackups, which can only drill in shallower waters.

Jackups rigs were hit harder than deepwater ones as energy companies scaled back drilling activity to protect margins and counter mounting inventories, hurt by the steep fall in oil and gas prices from record highs seen a year ago.

This prompted companies like Transocean Ltd (RIG.N), the world's largest offshore rig contractor, to take capacity out of the oversupplied shallow-water market by stacking jackups.

In September, Transocean had forecast signing more deepwater contracts in the next several months, and said it expects to maintain dayrates topping $500,000 a day. [ID:nN10396260]

Q3 MARGINS UNDER LENS

Pride reports results a week after Diamond Offshore Drilling Inc (DO.N), the second-largest oil and gas rig contractor, reported strong third-quarter results, boosted by gains from its deepwater rigs. [ID:nN22516457]

Pride's third-quarter outlook is for a profit of 38 cents to 43 cents a share, compared with Wall Street expectations of 43 cents a share, according to Thomson Reuters I/B/E/S.

"They have had everything booked, so there is not a lot of variance. It is really nothing more than timing and where their operating costs come in," said Jefferies & Co's Judson Bailey, who expects a third-quarter profit of 41 cents a share.

However, analysts are focusing on Pride's quarterly margins after the Seahawk spin-off. The company had spun off its Gulf of Mexico shallow-water operations in August to focus on the more lucrative deepwater business. [ID:nN2453409]

"Their margins have severely dragged behind other big drillers, primarily due to mat jackup rigs. If they can get margins into the 60 percent plus region, I will view that as highly positive for the company," Pritchard Capital Partners analyst Brian Uhlmer said.

Uhlmer, who said he will look closely at margins for the current quarter when Pride reports, believes drilling activity in the U.S. Gulf of Mexico is "still very ugly."

Analysts expect Seahawk Drilling Inc (HAWK.O), the mat jackup business spun off by Pride, to report a third-quarter loss of $1.65 a share when it reports on Nov. 12.

Barclays' West, who sees the weakness in jackup business to continue, expects the spin-off to help Pride lower its expenses and add a cent to third-quarter profit.

"I do not expect to see a bottom in this business, until late 2010, and maybe a recovery sometime in 2011." (Editing by Pradeep Kurup)