Clients of Spears & Associates have been very loyal in 2020 in the midst of the harshest cycle the oil industry has experienced since we were launched in 1965. We’ve had a few who chose to not renew subscriptions, and we’ve had others who scaled back their subscriptions, but 350 corporations still rely on us as we race toward the last quarter of this exhausting year. Here is why I’m thinking about this:
The one database we subscribe to is provided by Enverus (formerly DrillingInfo) who has a GPS tracker on pretty much every drilling rig in the US. We rely on Enverus to help us know where to look for activity in the US, who the oil companies are, who the drilling contractors are, and how pad dynamics are unfolding each quarter (one well pads, two wells, three wells…). In reviewing their data recently I noticed this: Drilling rigs either at work for one oil company in one basin, or they don’t work at all. This probably applies to 9 out of 10 rigs running in the US – 90%.
I assumed (wrongly) that a drilling rig would happily work for an oil company drilling a series of wells on pads and, once released, would hustle over and drill for a different oil company in that same basin. That, however, doesn’t appear to be the practice these last couple years. If Bill & Ted’s Drilling Rig #1 finishes working for Billy Bob’s Giant Oil Company, Rig #1 probably goes idle until Giant Oil decides to drill another well. Then Rig #1 stands back up and goes to work. Otherwise it waits out in a cow pasture trapping tumble weeds for a week or a month or 6 months or a year. There is incredible stickiness in the relationship between the oil company and the drilling rig. It almost looks like the two are married.
One reason the drilling rig doesn’t go to work for another oil company is that it is very, very hard to displace an incumbent supplier when the market is flat or falling. The contractor might go to work for another oil company if the market is growing, but the market hasn’t been growing for a few years.
Here’s how customer stickiness is good: The people at the oil company and the people at the drilling rig know very well what the other wants and how the other performs and thinks and reacts. Trust develops. Processes get very efficient.
Here’s how customer stickiness isn’t good: Where is the innovation? Where is the new thinking, the trial and error, the testing of alternative methods and companies and technologies? And how about this – as a driller, you may have 12 years on a rig in the Midland Basin, but you’ve lived and worked in the bubble of one oil company and one drilling rig. Instead of 12 years of experience, do you actually have 1 year of experience 12 times?
Our firm has worked on thousands of M&A transitions around the world where an oilfield service company is being looked at by an interested prospective buyer. The WORST investments are in those companies who have one big customer and a few minor customers. This so-called high customer concentration warns the prospective buyer that the service company may only know how to work for that one customer and perhaps that one person within the customer company. The risk of that relationship dissolving is enormous, or in the rig example, when your oil company customer decides to quit drilling, your rig goes idle because nobody else knows anything about your rig.
Fifty plus years ago when our father launched this business, we relied a lot on our two big customers, Baker and Dowell (now Schlumberger). When they were busy, we were busy; and when they were idle, we starved. Baker and Dowell are still clients, but we have 348 additional clients now, and we sleep far better in a crappy year like 2020.