Doug Sheridan's  Instablog

Clearly, it’s a more competitive world these days. The intense sellers’ market that existed during the last upcycle has all but evaporated in most, if not all, major segments of the oil and gas industry. Along the way, much of the vast inventory of new and replacement customers, markets and projects that oilfield suppliers had grown accustomed to essentially dried up. The cushion of significant excess demand that previously took the industry to new heights has simply, and remarkably, vanished. 

Reading through Gardner Denver’s (GDI) 2008 annual report recently, we noticed something worth mentioning.  In the first 23 pages of the report –- i.e., the glossy portion of the report that includes the CEO’s letter to readers and a discussion of the company’s culture and its plans for the future –- the word “customer” was used a total of 56 times by our count. That’s twice per page.  Moreover, of these mentions, over 40% were in the CEO’s letter.

So why do we believe this is significant?  It’s simple. Our experience is that companies that willingly and whole-heartedly place customers at the center of their stated strategies tend to in fact register greater customer satisfaction and loyalty over time.  Essentially, by upping the bar on themselves, they in effect leave left less room for underperformance, excuses and self-denial.

Of course, just because a company and its management invoke the word “customer” does not mean everything just falls in place.  Like most things, achieving high-levels of customer satisfaction over time requires hard work.  It also requires the genuine commitment of upper management.  To be clear, EnergyPoint Research’s independent customer satisfaction surveys don’t suggest Gardner Denver is starting from the back of the pack when it comes to oil and gas industry.  While the company does have a ways to go to meet the lofty expectations ostensively set in its latest annual report, its customer satisfaction rating in our surveys since 2005 is close to the industry mean.  Maybe more importantly, Gardner Denver’s ratings outshine at least one of its peers, industry giant National Oilwell Varco. Click here to read our latest thoughts on NOV and other rig-related equipment providers.

All things being equal, it’s always better to have the winds of history at your back than in your face.  For the most part, history should be on the side of Precision Drilling (PDS), even in these darker days of the oil patch. The company’s reputation as a capable drilling contractor and oilfield supplier –- a standing corroborated in independent customer satisfaction surveys conducted by EnergyPoint Research going back to 2004 –- will likely prove advantageous as it, like all North American land drillers, attempts to navigate what is almost certain to be a seller’s market for the foreseeable future.  Put simply, because customers are more inclined to work with contactors that have effectively met their needs in the past, Precision’s likely got a step up on peers such as Nabors Industries (NBR) and Patterson-UTI (PTEN).

So, what exactly are Precision’s strengths?  According to our data, the company is especially well regarded for its ability to complete jobs on schedule and as specified. The quality and reliability of its field personnel also stands out. That said, management has its work cut out for it going forward.  In its 28-page 2^nd Qtr 2009 earnings release (yes, you read that right… the company’s quarterly press release was 28 pages long!!), Precision reported an average 77 drilling rigs as working during the quarter.  With a fleet of 388, this equates to an unusually paltry utilization of 19.8%.  This is down from 167 working rigs and a 43.0% utilization in the prior quarter, with the declines driven by spring break-up in Canada and overall weak demand.

Of course, timing is everything, and Precision acquired Grey Wolf at the top of the last cycle in late 2008.  Thus, despite having undoubtedly longer-term and strategic reasons for the acquisition, the company currently finds itself faced with considerable challenges.  Not only is it asset-heavy in what management calls a “dismal” market, our data suggests there’s work to be done with Grey Wolf as survey respondents fell out of love with the company during the last upcycle.  Accordingly, we suspect Precision will need some time to upgrade that side of the organization.  In short, Precision clearly has plenty on its plate; but these guys are seen as being good at what they do -- or, at least they have been in the past.  And in the end, that’s a nice history to have.