MANAGEMENT & ECONOMICS:50 years of experience speaks

an exclusive interview with Offshore, Bob Palmer, chairman and CEO of Rowan Companies Inc., reflects on 50 years in the drilling industry.

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Judy Maksoud
International Editor

Rowan CEO Bob Palmer talks about people, platforms, and profits

In an exclusive interview with Offshore, Bob Palmer, chairman and CEO of Rowan Companies Inc., reflects on 50 years in the drilling industry.

Offshore: You have been Rowan's chairman and CEO for 31 years and have been with the company for 50 years. How has Rowan changed since you started your career?

Palmer: Obviously, the numbers have changed a lot. Rowan had about 700 employees 50 years ago, and today we've got over 5,000.

Yet in some ways the numbers haven't changed that much. When I came to work for Rowan roughnecking in 1963, the company had about 25 or 30 drilling rigs, and that's the same ballpark we're in today. But obviously, the capital investment is significantly different. Those drilling rigs were probably worth $10 million. Today I'd guess on a replacement cost basis the value of Rowan's fleet is between $3-$4 billion.

OS: What do you consider your greatest contribution to the company?

Palmer: In the time from 1979 to 1982, when the world was building drilling rigs and going crazy, we constrained ourselves to only building two rigs a year, while many of our competitors were building five, six, or seven rigs. We were protecting our balance sheet as best we could for the inevitable downturn. It was obvious there would be a downturn with the over expansion that was going on. So we tried to prepare ourselves.

I can't say that when it happened in the fall of 1982 that we were completely ready for it, but we were more ready than most of our competition. As a result, Rowan did not go bankrupt. And essentially every drilling contractor that was independent, without a parent to assist them, went into some form of default. We didn't do that. I think the one thing that differentiated Rowan is that we paid all of our bills, we paid them in full, and we paid them on time.

The three things we harp on all the time are our people, our equipment, and our balance sheet. It makes the business pretty simple, though folks try to make it a lot more complicated than that.

OS: You have referred to Rowan as a "different breed of cat." What makes Rowan unique?

Palmer: The people culture is one distinguishing factor on the drilling side, and that's 80% of our business.

We truly hire only at the entry level. We hire only roughnecks and roustabouts. It's been at least 20 years since Rowan hired a driller. We grow our own.

We require a lot of loyalty out of our people. If you quit Rowan and go to work for another drilling contractor, we'll probably hire you back, but you'll come back as a roughneck.

If you look at an age profile of our tool pushers, the average age is 45, but they all have more than 20 years' experience with the company. We have few drillers with less than 15 years of service with the company. That's what makes us a different breed of cat.

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C. Robert Palmer, chairman and CEO of Rowan Companies Inc.
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OS: What does an employee get in exchange for that kind of demand for corporate loyalty?

Palmer: If a company is hiring at entry level and demanding loyalty, it owes something in return to its employees. What we owe them is a fairly high level of job security. It is not accurate to say we have never laid off any of our crews, but certainly, that has been at the absolute minimum.

Cutting personnel makes for a simple decision. Labor makes up over 60% of your direct cost. So in the near term, it makes perfect financial sense to fire people.

Rowan has made a very conscious effort not to lay people off. There's no question that policy is very costly during the downturns, but we believe that it more than pays off during the up-turn. We're seeing the benefits today.

Having said all the paternalistic things, I should also say that we're pretty ruthless. We are a one-strike-you're-out company when it comes to cheating and stealing. We have a very strong zero tolerance drug program. If you test positive, you're fired. But I think that helps the culture along. The employees know they are going to be the kind of employees that Rowan wants them to be or they will be gone.

OS: At the Oilfield Breakfast in October 2002, you said that one of Rowan's goal would be to work smarter, not harder. Is building new rigs the primary way Rowan is making that happen?

Palmer: A very specific example is that we went into the South Timbalier area with one of our Gorilla rigs with every bell and whistle you can think of. We drilled that well for $12 million. A major oil company drilled an offset well on a different block with a cheaper drilling rig that didn't have all of this capability. It took them $25 million to drill the well.

OS: In your opinion, how does Rowan deliver value to its customers?

Palmer: We don't have anything but value to sell. We've got the highest cost structure in the industry. Our labor is higher. Our maintenance program is higher.

Some work that was done by IADC some years ago through an accounting firm showed a direct expense for labor and maintenance for Rowan that was at least $2,000/day higher than the competition. If you're going to spend that money, there needs to be a payback. We're hoping that our payback comes in the form of higher dayrates.

One thing we can deliver is a greatly reduced breakdown time for the drilling rigs. Many of our contracts, particularly for our new rigs, agree that any time the rig is down, we receive a zero dayrate. This proves to the operator that using our rig is not going to create a problem for them.

One of the things some of our competitors do is set up a five-year program to go into a shipyard and upgrade a rig. So they don't do anything during that five-year period that they can get by without. When the rig goes into the shipyard, the company takes all of that expense and doesn't run it through the profit and loss statement. They capitalize it as a rig improvement. We're not doing that. We keep our rigs fully maintained on a daily basis, which makes our operating costs higher.

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The Gorilla VII moving to the North Sea.
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OS: You have said that if the day comes that the machines are not reliable and the crews aren't capable, revenue is going to shrink, and the firm collapses. How does Rowan guard against that eventuality?

Palmer: We seldom lose an employee to a competitor. We do have turnover in employees, mostly people who decide to get out of the oil business. In 1997, when we had a mini-boom, we lost five of our good drillers. None went to competitors. Along came the downturn about 18 months later, and they were laid off. All five came back. Four are now working for us.

The thing that most drilling companies won't accept is that if oil is at $15 a barrel, you're going to lose money. It doesn't make any difference what you do to cut cost. You're going to lose money when the rig demand goes down. Why destroy the very thing that's going to help you make money when times are good? Wall Street gets an awful lot of blame, and probably some of that blame does go to Wall Street. If your company doesn't make somebody's quarterly earnings by one cent a share, they take your stock down 15%. So you get Wall Street fever, and you let that start driving business decisions, and you're already in trouble. We've seen that with a lot of companies that have collapsed recently.

OS: How is today's business climate different from the past?

Palmer: I don't see today's business climate as so different from the past. It's more of the same. We're just in a plateau period, and something's going to change. It's either going to get a lot better or a lot worse. I believe it's going to get a lot better.

I said eight months ago that we would see gas at over $5. The fact is that gas is at $5. Certainly, there was no anticipation that oil prices were going to be at their current level. And certainly no one assumed a $30 oil price.

Two years ago, there were major oil companies insisting that oil was going to stay between $12 and $15 forever. It's not likely that oil prices would stay that low for long. As somebody once said, the solution for $10 oil is $10 oil. And that's exactly what happened. Suddenly supply and demand got back in balance.

OS: Where do you see Rowan going in the next 10 years?

Palmer: The basic belief at Rowan is in the value of niche markets. We have selected the North Sea, Eastern Canada, and the Gulf of Mexico as the areas where we want to concentrate. We think our Gorilla class rigs meet the operational and regulatory requirements for Eastern Canada and the North Sea. We have viewed the GoM for a long time as our natural gas market. We think natural gas provides more profitable opportunities for our customers than does the oil market. So you've seen us concentrate on gas in the Gulf. All but two of our rigs are in the Gulf of Mexico.

OS: What are some of the things that Rowan will need to do to remain competitive?

Palmer: We'll continue to work in our core areas. Rowan moved into Atlantic Canada in 1981. It has never fulfilled its promise, but I think it will. That's the reason we maintain our office there. Next year could be the turning point. If you talk to Encana, El Paso, Canadian Superior, they have some very active programs over the next few years.

It's good that we're getting new people in Eastern Canada. And I'll guarantee you that if Canadian Superior finds oil up there, they won't wait five years to bring it onstream. And I don't think El Paso will either.

The North Sea is undergoing a very significant change because beginning two years ago, the Department of Energy decided they could no longer depend on the supermajors to provide them with tax revenues. They were going to do what they could to bring independents in. There is a fallow acreage problem. Some companies have been sitting on leases for 20 years and have never drilled them. Now, there is a push for marginal fields to be developed. And of course, the supermajors aren't interested in bringing on another 20,000 or 40,000 b/d. But to an independent with zero production, 20,000 b/d is a good thing. The government has definitely eased the requirements for independents to go to work in the North Sea.

OS: So what is the secret for the future of E&P in the Gulf?

Palmer: Gas. That has been obvious to me for at least five years. Demand was growing much faster than supply. What created a little bit of an anomaly was all of the changes in well completion techniques with super frac jobs. That carries with it a downside.

If predictions are even close to being right, within 10 years, the US demand for gas will be at 30 trillion cubic feet. We're currently producing 22 trillion cubic feet. In 10 years, existing wells will be down to probably under 10 tcf. That means we have to find 20 tcf of gas. And the only way we're going to do that is if gas prices remain high. My personal feeling is that gas will stay between $5 and $7 for the next 10 years.

Gas demand has been a part of our strategy in developing our Tarzan class rigs. We believe these gas prices are going to hold. The fact that we have Minerals Management Service agreeing to royalty relief as long as gas is under $5, I think reinforces the $5 number. That number is up from $3.50 on earlier royalty relief programs. Now the move is afoot to grant royalty relief to existing leases. That might happen. Certainly, we have got people at the MMS and in the Department of the Interior who want that to happen, but there are so many political issues to be resolved in Washington, D.C., that it's hard to focus on something like that.

OS: How has consolidation changed the face of the drilling industry?

Palmer: For one thing, we have fewer competitors. In 1981, I was the incoming president of the IADC (International Association of Drilling Contractors). We had 400 drilling companies joining IADC that year. That amounts to more than one joining per day. We had at the peak about 1,200 drilling contractors. Today, there are about 300. Ten or 12 drilling companies own 70% of the rigs in the world.

My question is, "Who has benefited from that?" The shareholders have not benefited. All you have to do is look at the track record and the stock prices of the companies that have been most active in consolidation. Their stock has underperformed. Certainly, employees have not benefited. Investment bankers, lawyers, and accountants have made money.

We have not seen any reason for Rowan to be an acquirer of other companies. First, we would be buying old drilling rigs, and we would rather see our money spent on new state-of-the-art drilling rigs. Second, you're acquiring an organization that is in turmoil and an organization that does not have the same culture, which is a major issue.

OS: Where is the future of the drilling industry?

Palmer: I see a very bright long-term future for drilling contractors that can deliver value, and I think those drilling contractors who do best will be the ones who have a niche strategy, both a geographic niche strategy and an equipment niche strategy. And we have that. That is what's going to set Rowan apart over the next 10, 15, or 20 years.

I think it is a strategic mistake to try to be all things to all people and to be willing to work any place on planet Earth. You just can't do that and make money. I also think it's a mistake to have a wide variety of drilling rigs because each type requires a high level of expertise in your engineering and operating groups. And when you stack these on top of each other, it builds overhead. We try to keep our overhead on our drilling division in the range of 4% of gross revenue. We could not do that if we had a lot of types of equipment and operated in different parts of the world.

OS: Danny McNease will be the fourth CEO for Rowan in 80 years. How does the longevity of CEOs in the company impact the company as an entity?

Palmer: Danny understands that the only source of revenue comes from a customer, and he's very customer oriented. He knows operations. He knows his way around. There are a lot of things Danny hasn't been exposed to yet in the corporate world, but he'll get there.

Everybody who has been in top management at Rowan has come out of drilling operations. The reason a customer hires us is to dig a hole in the ground. If you have people who don't know how to dig a hole in the ground, why are they in this business?

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