Sam Fletcher
OGJ Online
C. Stedman Garber Jr., the new International Association of Drilling Contractors chairman, was upbeat about demand for rigs during his first visit with the group's Houston chapter last week.
It also marked his first address to the Houston group as president and CEO of the new GlobalSantaFe Corp. Garber was formerly president and CEO of Santa Fe International Corp., Dallas, which merged with Global Marine Inc., Houston, through a stock-swap transaction on Nov. 20 to form the world's second largest offshore contract drilling company. : Transocean Sedco Forex Inc., Houston, is the largest.
Garber said reduced production and growing demand should help improve prices for oil and gas in the second half and trigger an increase in drilling activity.
"When talking about the outlook for our industry, I always prefer to talk about the medium term. I tell analysts that we don't run GlobalSantaFe for the short term," he said.
US outlook
"For the medium term, the fundamentals of our industry continue to be very sound," he said. "I believe that the longer drilling activity in the Gulf of Mexico is suppressed, the greater the resulting production decline will be and the sharper the snap back."
However, Garber said, "I'm sure not smart enough to say when it will be. Given the current level of natural gas in storage, I'm afraid winter would have to last into next July to have any substantial positive impact on gas prices through the first half of the year."
Instead, he said, "My hope is that we will have enough cold weather to draw enough gas out of storage so that a combination of an upturn in economic activity, along with the continuing production decline, can create enough price pressure in the second half of the year to create increased drilling activity at home."
International outlook
"Internationally, I am cautiously optimistic for several reasons," said Garber. "Our customers have continued to exercise restraint when oil prices were higher by not pursuing projects that required prices much beyond current levels. In fact, many insisted that they continue to run their economics at prices below current levels."
Although oil markets recently tested prices below $18/bbl, he said, "I believe that at these levels our customers will continue with most of their important international projects."
Further decline of oil prices cannot be ruled out. "But just as we saw in late 1998 and early 1999, the impact of prices below $14/bbl or so for any appreciable period of time becomes just to painful for the major Middle Eastern producers to withstand," said Garber. At those low price levels, he said, Middle Eastern producers would be forced to take action to bring the market in balance.
Such a sharp drop in oil prices "would cause our customers to be cautious," Garber acknowledged. "But I also believe they are very interested in not repeating the violent decreases and increases in their workforces that have characterized past cycles, so that we would not see a significant reduction in their programs," he said.
Workers and safety
"To me, one of the most important aspects of our business that we must tend to, regardless of the cycle, is hiring, developing, and retaining our people," said Garber.
"I believe that the people issue is the most critical facing our industry today and that we as an industry must find a way to provide rewarding career paths to young people who are just starting out," he said. "We must be willing to retain people during downturns and use the time for rigorous training and other development activities."
"There are a number of reasons to be concerned about the lack of stability of employment in our industry, but without a doubt the most important is safety," Garber said. "I believe one of the most important elements in the creation of a safe working environment is the experience that a cadre of well-trained people brings to an operation."
He said, "A strong safety culture can be infectious if you have strong leaders who make their belief evident in their daily interface with subordinates. I believe a person who sees this industry as a career opportunity rather than simply a job is more likely to have a positive and constructive attitude towards safety."
In November, the IADC published guidelines for cargo handling that Garber expects will reduce accidents involving rig crew aboard work boats, which account for 7% of all drilling industry lost time injuries in the Gulf of Mexico.
Consolidation
"One of the questions that I am frequently asked is: Will consolidation continue both in our industry as well as by our customers," said Garber.
"It is probably true that most of the obvious transactions," the "large company to large company deals" have been done, he said. However, Garber said, "I believe consolidation will continue among our customers both for strategic reasons as well as the fact that our industry will inevitably continue to be cyclical; therefore presenting at times opportunities to acquire reserves cheaper through another company than with the drill bit."
He said, "In our own (contract drilling) industry, I also believe consolidation will continue, driven in part by a desire to serve larger customers better but also driven from time to time by opportunities to acquire equipment at attractive prices."
Garber said, "As our major customers have consolidated, one of the places where they are seeking efficiencies is in the procurement of one of the larger items in their overall spending, which is drilling services."
Santa Fe-Global Marine merger
"Whether or not a better way for our customers translates into a better way for us drilling contractors remains to be seen. But in this world of evolving relationships, Bob (Robert E. Rose, former chairman, president, and CEO of Global Marine and now chairman of GlobalSantaFe) and I felt that in creating GlobalSantaFe, we could offer our customers a drilling contractor that could serve them in virtually any market in the world with virtually any type of equipment from a land rig to deepwater drillships," Garber said.
"I would say this vision was certainly one of the most important drivers behind the merger. With our fleet of 59 offshore rigs and 31 land rigs and experience in virtually all of the world's important drilling markets, we believe we have accomplished just that," said Garber.
Hiring a top management consultant firm "early on" to assist with the merger "proved invaluable in helping us set priorities and organize the process by which we would achieve a sound integration," Garber said.
"When you start this process, you immediately think of a thousand things, which all seem like they need to be done immediately. The consultant helped us focus our priorities initially on those things that needed to be done by the closing of the transaction," he said. "Even though it was only 78 days from announcement to close (of the merger), I was confident that we were ready to operate as a new company on the closing day.
"As far as the rig crews, my greatest concern was that they continued to focus on their jobs and safety and not worry about the merger. It's hard to measure how we've done at this, but early and frequent communication is definitely part of the formula for success."
Since completion of the merger, Garber said, "We have continued to focus on developing best practices for virtually every aspect of the company's activities.
"One of the misconceptions that I brought into this deal was that a true merger of equals would be more difficult than an outright acquisition. Now I'm not so sure this is the case because, recognizing that this was a merger of equals, we have had representation from both legacy companies involved in evaluation of all of our activities."
Unlike an acquisition, said Garber, "There was no presumption from the beginning that one [company's] methodology would be crammed down [the other]. When you cram something down, you always get resistance."
Instead, he said, "There was an expectation that what each legacy company brought to the table would be carefully evaluated. And when a small task force working on, say, procurement or perhaps rig maintenance, arrived at a recommended procedure, members from each legacy company had to buy in before the recommendation would move forward. I believe we are getting buy-in."
Contact Sam Fletcher at [email protected]
