Slaughter, Lou S., Binkerhoff Maritime Drilling Corp., Indonesia
The paper is a financial evaluation of an offshore drilling rig venture. It pertains to other ventures world-wide involving substantial investments in pertains to other ventures world-wide involving substantial investments in offshore marine equipment. The scope of the paper ranges from a discussion of the drilling industry to the financial proformas covering the operation of the equipment.
The points that the presentation covers are as follows:
The structure economics, marketing and financing for the drilling industry.
The strategic matching of the opportunity with the operating environment, resources and management disposition of the company.
A financial analysis of the venture including:
"Back of the envelope analysis".
Construction period projection.
Proforma as at commencement of operations.
Net present value analysis.
Additionally the paper draws attention to issues that are important to the above evaluation.
The paper should enlighten and be well received by those participants to the conference who are mainly orientated towards the technical side and not the financial aspects associated with marine ventures.
Management today is too concerned with the technical aspect of its projects and inadequate attention is paid to the financial ramifications projects and inadequate attention is paid to the financial ramifications of its activities. An example is the overwhelming number of technical papers presented in this Conference. Yet with the large investments sustaining marine activities today. It behooves management to pay increased attention to the monetary considerations. It was on this premise that I was invited to present a paper today dealing with the financial aspects of a marine venture.
In presenting this paper, I offer to you the basic outline of the procedure that I use in evaluating a potential venture. I have procedure that I use in evaluating a potential venture. I have restricted this paper to a simple analysis of an offshore rig venture, although it is applicable to most marine ventures. Before proceeding further. I will give a brief overview of the drilling industry which will be beneficial to those of you with little exposure to t he business. More specifically, the industry's structure economics, marketing and financing will be covered.
Essentially, the drilling rig business involves a contact between an oil company, commonly referred to as the operator, and an independent contractor. The contract engages drilling services for a term ranging from 30 days to 5 years. It specifies the obligations, liabilities, and rights of each party. The contractor is responsible for providing the rig, equipment and personnel. The contractor bears the operating, business and financial risks. The business is equipment intensive with a rig having numerous and diversified pieces of equipment along with the associated operating problems. Ideally, the contractor is able to allay most of these difficulties by hiring a contingent of highly skilled and experienced personnel. The rates charged in the contract are referred to as "day rates" and represent the contractors total compensation for all operating costs, capital invested and profits.
The business is highly cyclical. The viability of an offshore venture directly correlates with the demand and supply within the industry.
The market place is essentially inelastic i.e. the contractors have long lead times on equipment deliveries and cannot always react in sufficient time to the movement of the operator's demands worldwide.
There are many exogenous factors influencing demand such as host government regulations, worldwide demand for oil and gas, to name only two The contractor's ability to forecast and react in limited. The net result is that the industry continues to experience that cyclical whiplash brought on every time one rig goes wanting for work.
One of the keys to a contractor's survival is marketing ability. The marketing arm of each contracting company should have the insight to enable it to provide the expertise and the equipment needed at the right time and right prize. This encompasses having desirable equipment diversification and geographic dispersion.
Given the debt leverage as well as the operational leverage involved with an offshore rig venture, a strong competitive advantage is realized by those contractors that can negotiate favorable terms and rates of financial packages vis-a-vis other contractors.
The following evaluation is premised on an available opportunity. Given the opportunity, management is then obliged to evaluate its viability.