Tesco: Innovation Is Not Always Enough

The road to acceptance by the oil and gas industry of even the most innovative and compelling technology can be long, winding and arduous. This is especially the case if the technology seeks to supplant a more conventional way of operating that has heretofore “gotten the job” done in seemingly adequate fashion.

Take for example the plight of Tesco’s (TESO) drilling-with-casing and casing-drive technologies. Both are viewed by many industry observers as possessing the potential to revolutionize the way wells are drilled and casing is installed in the oilfield. Yet, widespread uptake of these technologies by the industry has remained relatively elusive.

Tesco’s management is steadfast in its conviction that its distinctive technologies will eventually carry the day. But the company’s financial results do not suggest any kind of inflection point has yet been reached towards realization of this goal. Operating earnings for the company grew only 25% from 2006 to 2008, one-fifth the rate of industry heavyweight and Tesco competitor National Oilwell Varco (NOV) over the same period.

Moreover, all of Tesco’s earnings growth was driven, not by its newer technologies, but by sales and rentals of its more established line of top drives. The company’s first-quarter 2009 results were also skewed toward top drives.

One factor potentially hindering greater acceptance of Tesco’s innovations may be how the company and its products are viewed in the market place. Over the years, respondents to EnergyPoint Research’s independent customer satisfaction surveys have rated the company in the bottom quartile in terms of quality controls and inspection processes. This is in stark contrast to its top-quartile ranking for the ability to develop value-creating technologies. Drilling contractors seem especially prone to rate the company lower, with one respondent referencing “incorrect technical specs, hidden defaults, bad quality spares and materials, [and] weak support in the operations.”

Of course, not all respondents were critical of the company or its products. Nonetheless, Tesco’s ability to win over a habitually skeptical customer base may, in the end, depend less on its ability to develop a persuasive vision, and more on its ability to execute that vision going forward.

Disclosure: No positions