Uncharted

"Beating a dead horse." "Talking to a brick wall." "Arguing with a fence post." Well, I believe we are all starting to understand that we have reached a new era in our industry and even the hardest of heads are starting to break open and realize just how different things are turning out to be for them. Some just don't have the vision, others seem to ignore the signs, while many just can't seem to accept reality. In a previous article (Trouble Ahead For Traditional Oilfield Services Model) I wrote, 

"Did you build your company to increase costs for products and services in the future, or reduce them?"

I was referring to the ability for a supplier in this new era to be able to rescale or restructure their business model to be able to lower costs rather than raise them. I wrote that article to explain that, from my standpoint, we were entering uncharted waters in the industry and if suppliers did nothing outside their historical business model structure, they would most likely not survive in the future. In a recent article, analysts at Goldman Sachs indicated,

"Essentially, the global industry is trapped in a vicious circle of production at lower and lower costs that will continue to feed the oversupply of oil and keep prices in the current range."

They noted we were heading into a "New oil order", so to speak. So it seems as though there are many beginning to understand that the future will look different than the past for both operators and suppliers in the industry. Goldman goes on to support the lower commodity price range by saying, "For now, however, as countries compete for share through low-cost production, it seems as if the supply glut will stick around for a while and oil is unlikely to move past $60 a barrel."

Time and time again I have repeated to colleagues and peers within the industry, that lower prices will be essential for their company's success. Cutting costs in significant, but drastically different ways will be key to their survival. I often find very few seem to understand or believe this. They seem to lack the vision or be unable to look beyond their own past in order to see their future.

Let's take a moment and venture out of our industry to see if there are examples of industries faced with changing eras and how they were able to think outside the box to change and thrive within it. In the early 2000's the medical industry went through significant downgrading and structural changes. Few within it understood that it's future was changing and significant structure change was needed to survive in the future. The medical and surgical implant sector in particular saw the largest structure change in history. Cost cutting over growth strategies is what ultimately led them out and was able to reorganize them for future profitability. The automotive industry is another role model for structure change amongst challenging and changing times.

"These industries were able to overcome their challenges by creating structure change through individuals with vision outside their typical business model history."

Ask anyone that was employed in a business development position, in either of these industries, over the last 15-20 years and they will tell you that there were major shifts that occurred in their business models that led to successful change, and there were many that failed to survive.

We are entering uncharted territory because the industry is becoming trapped into a leveling out era vastly different than the historical cyclical model of the past. We are heading for a future of more predictable and sustainable commodity prices that will most likely remain consistent around $55-70 barrel for oil and $3.50-4.50 natural gas. With break even prices for most operators, this means 20-40% profit depending on their programs and asset locations. That's 10-30% profit at today's depressed supplier prices. What does this mean for today's struggling suppliers waiting for their chance to increase their rates 30-40%? It's not good news.

Currently, most suppliers in the services sector are working at rates that are at break even or at minimal margins, waiting for their opportunity to increase them to catch back up with higher rates when commodities recover. Well what if that doesn't happen? What if their customers look at this from a different perspective and angle? Just as our strategies needed to be different for a cyclical and largely unknown commodity pricing environment, so will we need a different strategy for a certain and more predictable commodity price environment.

"In this environment, the strategic responses that may have worked for upstream companies in the past are no longer relevant."

As an operator working to maximize profitability in this new era, I would assume they will be guarding their profits more closely than before. They will not be able to allow their suppliers to raise rates as they historically had in the past. This means that as a supplier, I must be prepared to operate at a low rate and perform as well as, if not better than before for possibly many years into the future. A successful operator will be an operator that can produce maximum profits at $35-55 dollar oil. They will not be able to achieve this allowing their suppliers and service providers to increase rates for products and services and expect to be successful. This means we must be able to rethink how my business is built and how to cut operating expenditures in unique and game changing ways. We must be able to maximize profit while quite possibly lowering price to gain market share. We need to be able to provide our clients with new technology without it costing us anything to produce or create. New technology is great, as long as that new technology reduces costs and doesn't increase costs internally. Its also great as long as you are able to charge more for it to offset internal costs for recovery of development and or maintenance.

Many need to ask themselves, "Is our company a technology manufacturer, or are we a service provider?" "Can we afford to be both?" There are some rough times ahead for traditional service providers that are not diversified and are unwilling or unable to make a significant business model shift. Most likely the majority of suppliers current management believes that they can afford to increase internal costs with more complex technology that saves the customer time and money, because the customer will see value and allow them to charge more for this technology in the near future. This is a gamble and a poor one at that. With major technology providers and manufacturers changing their models to open the marketplace for other service providers to access and utilize their technology that has been historically guarded from 3rd party providers, the industry on the service side is definitely entering uncharted territory.

For most suppliers, their future will require a very different structure than they currently have if they are expecting to thrive. What once was thought to be valuable to customers, may now be seen as excess and redundant. Many will shrink down to a much smaller footprint and find it impossible to grow if they cannot reshape their business model. I chose a much different path than others in the industry. I chose to not be a manufacturer of technology, rather a service supplier. I chose to partner with industry leading manufacturers of technology and gain access to lease it from them for our customers, and manage its use/application along with support from the source. I chose to build our company to focus on its premier capabilities, managing the directional drilling process efficiently. The result.....We were able to reduce overhead and maintain a superior service quality model where we could remain profitable in today's low cost operating environment.

This was only achievable by working closely with technology and equipment manufacturers in order to build a partnership that is different than anything we have ever seen. Some suppliers were unable to visualize what this looked like and grasp the reality that we will not be able to increase rates at expectations of many within the industry moving forward, while some were stuck in 1998 and were unable to come to terms with the current pricing environment. For the manufacturers and suppliers that were able to understand, their future is much brighter and their survival will be a testimony to their willingness to evolve. For others, they will be stuck with the reality that due to their lack of vision and management creativity, they suffered a slow death. With technology leaders like Baker Hughes, Schlumberger and Halliburton, forging alliances with smaller more nimble suppliers such as ours, opportunities can open up the market share in unique ways for them. When a small, focused service provider is able to provide their client with proven, reliable and advanced technology, they can provide unprecedented value. This is the path we chose for navigating in uncharted waters. Partner with technology leaders and focus on project management and execution for our clients.

So what are some major hurdles or roadblocks for change? Education. For years we as an industry have told customers that they cannot have quality, performance and price all in one package. This was actually the reality in our past business models and structure. They were not efficient enough to provide all 3 for the client, but the future of success means that we must change and create a model where this is possible and commonplace within the industry. We must educate our customers on the potential, possibility and our structure changes that make this possible. That building huge inefficient facilities and purchasing your own technology and equipment does not necessarily equal value for them. That having redundant systems and processes is actually costing them money instead of saving it. What we are seeing today, is a lack of willingness to change from the operators. A protection and defensive strategy that precludes anyone from allowing, or even listening, to change discussions. A, "I can't make a change and risk going backwards, or I would loose my job." type of strategy. I look at it from a different perspective. How could you afford not to change in this environment and expect to keep your job? Are we as an industry that far behind the rest of the world industries? Are we so afraid of protecting ourselves and our individual careers that we are failing to explore opportunities to improve for the greater good of our companies? Unfortunately, it would appear that this is the case.

Just as in the golden days of the medical and auto industries, suppliers and managers chose to cost cut in order to survive. Their willingness to stop taking doctors on expensive vacations and spend ridiculous amounts of money towards anything that was seen to be buying contracts, led to significant and positive change in their industries. After talking with some friends from these industries it would appear that they were exactly where we are now, only 20 years ago. They contribute the changes then as 'visionary', 'out of normal business practices', or 'different' than what they knew from their history. They all agree that these changes were required to get them where they are today and that only the extremely innovative and nimble companies survived the change. We cannot afford to buy expense trips for our potential customers, nor send them on a $50,000 hunting trip, but we can provide them with access to industry leading technology and manage their project in the most successful and efficient way possible. Isn't that what it's all about? Navigating uncharted waters takes vision, character, faith, dedication and planning to find your destination. I am completely confident we will not only survive, but we will rewrite the books on how to build and manage a successful business in this new era of our industry.