StockTalk:
TMF Interview With
Global Marine CEO Bob Rose
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)

September 16, 1998

Our guest this week is Bob Rose, president and CEO of offshore oil and natural gas drilling company Global Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %>. The company also provides turnkey drilling services, where it acts as a general contractor, and provides its clients with all of the services and materials needed to drill offshore.

TMF: Thank you for talking with us, Mr. Rose.

Rose: Delighted to be here.

TMF: If you could take a couple of minutes just to start of, what is business like today in the oil drilling world?

Rose: Our entire business is very dependent upon the perception and actual price of crude oil, and as everyone knows, crude oil is down about $8 a barrel from its highs of about five months ago, and as a result we've seen some reduction in activity, both in the deep water as well as on the shelf -- by shelf I mean water depths up to about 300 feet. We continue to see some softness in that market, and I think that trend will be with us as long as we have oil pricing in the $14 to $16 level. You really do need to have oil in the band of $19 a barrel to $21 a barrel before you get a really healthy, prosperous offshore industry.

TMF: What will it mean for Global Marine's business if crude prices stay in the $13 to $15 a barrel range over the next year or so?

Rose: We'll continue to be profitable even with that scenario. We benefit by the fact that we have a mixed or balanced fleet -- balanced is a better word. By that I mean we have both the shallow water -- the shelf-type drilling equipment, which are primarily jack-up rigs, bottom-supported rigs that operate out to about 350 feet of water. Additionally, we have the deep-water rigs. We have deep-water rigs currently in the fleet that can go out to 8,000 feet of water and two under construction that can go out to 10,000 to 12,000 feet of water. The deep-water rigs in our fleet are under term contracts, and therefore we're guaranteed revenues and income cash flow from that portion of the fleet, so that will enable us to weather the downturn if it lasts as long as you questioned.

TMF: Could you please explain what the relationship is between oil prices and how that carries through towards your earnings performance?

"You really do need to have oil in the band of $19 a barrel to $21 a barrel before you get a really healthy, prosperous offshore industry."

Rose: Certainly. Many of our customers are not the major oil companies of the world, but they tend to be the independent oil companies of the world, who have only one source of revenue and that is from their production. They are very much governed by the amount of cash in the bank as to the number of wells they can drill, and fairly they are the most adversely affected by low oil prices because low oil prices means for them lower cash flows from this production they're selling and therefore less money in the bank to be able to drill additional wells to find additional reserves to produce.

And when they start reducing their requirements for drilling services, it causes there to be a temporary oversupply of drilling rigs, and drilling contractors being what they are will tend to start lowering rates trying to find a point at which they can generate continued activity and keep their rigs employed. So when you see a demand decrease -- and there's one or two rigs in the world, particularly in our geographical area like the Gulf of Mexico -- that's available for work and doesn't have a job, then you start seeing day rates decline. That's how our bottom line is impacted.

One important thing to understand is that the operating cost of the rig doesn't change whether you're getting $65,000 a day for it or $25,000 a day for it -- a $40,000 a day differential comes right off the bottom line because it costs you the same amount of money to operate the rig.

TMF: Do you think you're better positioned than your competitors in dealing with this downturn in the oil industry?

Rose: We think we are for basically two reasons. One, of course, as I've already alluded to, our balanced fleet and the term contracts that we have in place, which guarantee us revenues and cash flows over an extended period of time -- certainly longer than the period in which we foresee low oil prices.

Secondly, because of our drilling management services group, applied drilling technology -- this group last year generated $400 million in revenues and dropped $50 million earnings or cash to the bottom line. And as we find more and more smaller companies, independent companies, beginning to venture offshore to drill wells, as major oil companies downsize, rationalize, streamline their organizations, more of the responsibility of drilling these wells are falling to the service providers, such as drilling management services groups.

We've got the largest group of service providers in that area. Our drilling management group last year drilled almost 110 wells in the Gulf of Mexico. That's more wells drilled in the Gulf than Shell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SC)") else Response.Write("(NYSE: SC)") end if %>, Exxon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %>, Chevron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHV)") else Response.Write("(NYSE: CHV)") end if %>, or anybody else. So we truly have a core competency that resides here, and no other drilling contractor has that capability.

TMF: You were talking about how the day rates for the rigs fall but the operating expenses pretty much remain constant. Does that mean that you really can't reduce hiring to save costs that way?

Rose: Well, what you can do and what has been done in the past, as you can agree, if you've got a fleet of rigs, and you see that you're not going to keep them all employed, you can take maybe one of those rigs and temporarily take it out of service. By doing that, you cease to market the rig. You then place the employees that are on that rig in other positions throughout the company and reduce the costs somewhat on that particular rig. But as long as you're working on the rig, your operating costs remain the same irrespective of the day rate that you're receiving. So when you see day rates go up or down by $10,000 a day or $50,000 a day -- whatever they are -- the amount they go up or the amount they come down impacts the bottom line directly.

TMF: What is your outlook for the price of crude oil?

"Our drilling management group last year drilled almost 110 wells in the Gulf of Mexico. That's more wells drilled in the Gulf than Shell, Exxon, Chevron, or anybody else."

Rose: Gosh, I wish I had a good answer for that. I have read everything that's available to read, I've listened to the experts out there, and today you can get a learned opinion about oil price anywhere from WTI [West Texas Intermediate] averaging $16 a barrel next year in 1999 to WTI averaging $24 a barrel in 1999. My view is it's probably going to be something closer to the middle, and as long as it falls in that range of $19 to $21 a barrel then I think business is going to be much better. Nineteen dollars to $21 a barrel is good for the consumer, it's good for the producer. It's really an ideal price, so I would hope we're going to be in that range. But there are clearly experts out there far more knowledgeable than I who have opinions on both sides of the spectrum.

TMF: What's your take on the current consolidation trend in the oil industry in general, and how does Global Marine fit into that general trend?

Rose: First, there has been consolidation going on for an awfully long time in this business. I think we have come to realize that product pricing -- and by that I mean oil and gas pricing -- is not going to rise tremendously, and therefore it's incumbent upon us to find more cost-effective ways of running our businesses in finding and producing oil and gas.

The service sector -- by that the Schlumbergers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %>, the Halliburtons <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %>, and the Baker Hughes' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %> of the world -- have done a very good job in consolidating. They're really beginning to consolidate to fewer players, where you've got a lot more economies of scale and some real cost-efficiencies. We've recently begun to see a number of major oil companies getting together for the same reasons. You can effect a lot of cost savings when you put together two major oil companies.

For offshore drilling companies, though, you don't have a lot of savings that you can realize because most of our costs are with the rig fleet that we own. They are all very rig-specific. So if you own 50 rigs, you have a cost basis. If you own 25 rigs, your cost basis is about half that much. If you put a 50-rig company together with a 25-rig company, about the only savings you get is in the general administrative area, which is very, very minute in terms of the overall cost structure. So, for drilling contractors to combine, merge, or consolidate there has to be other strategic reasons other than cost savings because the cost savings just aren't that significant.

TMF: If you don't see that as a way to grow earnings, what are ways you see for growing your business?

Rose: Well, I haven't given up on the possibility of being able to consolidate, merge, or acquire another company. But if that doesn't materialize, what we will continue to do is look for ways to leverage our drilling management services group in terms of increasing our earnings. One thing that we want to do through our ADTI subsidiary is to become involved longer in the life cycle of a well.

If you think about the womb-to-tomb life of an offshore field, and you think about the traditional drilling contractor's role, the drilling contractor simply goes out there and drills a few exploratory wells, if he's lucky maybe a few development wells. So he's really only involved in that life of that field for a very short period of time. If you bring [more] to the table as we do at our drilling management services group, we can also provide completion capabilities and even field-management capabilities. Then you hope to remain involved in the life of that field for a longer period of time and generate value for your shareholders in that way.

TMF: Do you think that's where the general trend of the industry is going in the next five or ten years?

"For drilling contractors to combine, merge, or consolidate there has to be other strategic reasons other than cost savings because the cost savings just aren't that significant."

Rose: I certainly do believe that. I think we for a long time have believed that eventually the oil companies were going to look more to the service providers -- the service companies -- to do these things, to assume a greater role. And I believe that the necessities of the economics of the business are causing that to occur, again for the reasons I indicated earlier -- the major oil companies are downsizing, the independents are becoming more active, and most of them do not have the staffs or the expertise to assume that role. So, I do see that as an opportunity for growth for companies such as Global Marine.

TMF: Which of your competitors in the oil world do you admire the most?

Rose: Well, I think there are two I admire, for different reasons. One certainly would be Ensco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ESV)") else Response.Write("(NYSE: ESV)") end if %>. Carl Thorne of Ensco runs a very good operation with his rigs. Carl is primarily a premium jack-up drilling contractor. In the deep water, I'd have to say I admire TransOcean (NSYE: RIG) probably the most because they are a real premium player in the deep water and ultra deep water and have a real quality fleet. I would say if you look at the shelf or the deep water, those would be the two companies that I would admire most.

TMF: A more general question: What's your view on the supply of oil still left out there? Is there still enough to support the industry for 20, 30 years down the road?

Rose: Well, I think there's enough there. The real question is whether or not there's going to be economics to continue to develop it. For example, the R-P ratio, which is the reserve-to-production ratio for gas in the Gulf of Mexico, has fallen from 11 years to 6 years, so rather than having available 11 years' worth of reserves offshore to supply natural gas, we only have 6 years. Now if that falls to one year -- 12 months -- we're going to have a serious problem. And it will continue to fall as long as oil prices remain low, and companies aren't out there drilling and finding other reserves because once you start producing a field -- from the very first day you start producing it -- the ability of that field to produce declines, so you have a declining reserve base, declining production level going on with all existing fields, which means you have to continually drill in order to replace those declines and keep your production high. When you're not drilling -- and right now there's something like 30-something jack-ups idle in the Gulf of Mexico that aren't drilling -- you're not drilling wells, you're not finding production, and you're not maintaining your ability to deliver.

TMF: And that's all the time we have. We'd like to thank you, Mr. Rose, for sitting down and talking with us today.

Rose: Thank you very much. I appreciate the opportunity to do that.

Related Links:
Global Marine website
Global Marine message board

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