Foreign Exposure
In 2005, Saxon Energy Services was a small firm, newly gone public. Then a new management team jumped aboard from a downsizing competitor, and everything changed – quickly
by Bruce Weir
These rigs are complex and expensive, and take about nine months to build at a cost of approximately $10 million US. In fact, Saxon experienced some delays in building the rigs for EOG. “They’re sophisticated rigs with newer-edge technology,” Tremblay explains, “and there’s just not a large
number of people who are qualified to work on equipment like this.” (With plants in Alberta and other oil hubs running flat out, the job was contracted out to a manufacturer in Spokane, Wash.) The last of the five new ATS rigs will be delivered by early 2008.
Those new rigs will contribute to Saxon’s bottom line, which is welcome news in itself but also because they provide a bit of certainty in a business that can often be unpredictable. In Ecuador elections to the constituent assembly took place in October. A new goverment was elected, leading
to permitting delays for Saxon. This meant that utilization of its fleet in Ecuador fell to 82% in the third quarter from 95% in the previous quarter.
Another unexpected challenge came with the dramatic rise in the value of the Colombian peso in the second quarter of 2007. Because Saxon’s Colombian contracts were denominated in U.S. dollars, the increase in the peso took a bite out of earnings. By the end of April 2008 all those contracts will be partially denominated in pesos, giving Saxon a hedge against further increases. Of course, these sorts of challenges are not limited to foreign markets.
“Then there was that other weak currency known as the Canadian dollar,” Tremblay says, noting that today’s strong Canadian dollar has increased the cost of domestic operations. In addition to the spike in the dollar, the drilling market in Western Canada has been battered by low prices for natural gas and, in Alberta, by the government’s royalty review.
The Petroleum Services Association of Canada estimates that there will be 17% fewer wells drilled in 2008 compared to 2007. At Tristone, John Tasdemir feels the market will remain in a downturn for at least another ten months.
For Saxon, that means taking some lumps. “We have rigs in Canada that are idle, but it’s our vision that, longterm, the Canadian market is going to come back,” Tremblay says. “So we need a presence. You just can’t abandon a market and think you can just show back up. We’re in markets that we believe in, that we have experience in, and we’re comfortable in all of them.”
A great deal of that comfort comes from geographic diversification, in spite of the uncertainties it brings. “Yes, as we are getting bigger overall we’re exposing ourselves to more issues, but it’s a smaller percentage of our overall revenue and earnings,” McNulty notes. “So we can withstand a bit of a shock here in Canada and really not miss a beat. We can still deliver record revenue.”
Geographic diversity also brings with it diversity in terms of what customers are drilling for, oil or gas. Saxon has a roughly equal split (53% oil, 47% gas), meaning that, as Tasdemir puts it, “They’re somewhat insulated if oil is up and gas is down or vice versa.”
Given the soundness of its international strategy, it comes as no surprise that Saxon is contemplating further growth. McNulty says the management team “looks at one deal a week,” from drillers selling rigs, but that the equipment is generally older and not a good fit with Saxon’s fleet. The company is also contemplating expanding into Brazil and even the Eastern Hemisphere, although both moves are still being studied and no announcements are imminent.
It all means that an already busy travel schedule could become even more crowded for Saxon’s senior executives. While that may leave them jet-lagged, there will be other benefits. After all, travel not only broadens the mind, it has a similar effect on business opportunities.
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