David Mullen – CEO, Shelf Drilling, Abu Dhabi
Shelf Drilling´s CEO, David Mullen, discusses the inspiration behind the company’s founding, being the world’s largest independent jack-up rig company, their industry-leading safety record, the performance culture he tries to cultivate, and how a focus on “Perfect Execution” has helped to differentiate them and redefined the industry’s standards of success.
Shelf Drilling began with the acquisition of 37 jack-up drilling rigs and one swamp barge from Transocean and has been described as “the billion-dollar start-up”. Tell us the exciting story of how Shelf Drilling came to be.
I believed that shallow water has greater potential than deepwater owing to the vast reserve base and the substantially lower break even economics. Approximately eighty percent of global offshore reserves are in shallow water but perhaps more importantly, the breakeven economics and cycle time is substantially less for shallow water than deep water developments. Deepwater exploitation is characterized by being high risk, technologically challenging, very expensive and with long cycle time.
It was a protracted negotiation with the selling company, commencing in the summer of 2011 and closing in late 2012. Fortunately, we had a motivated seller and the transaction was at a time where shallow water was very much the unloved business segment, the attention amongst all the contract drillers was on deepwater and expansion into very capital intensive deepwater drilling.
Owing to the size of the transaction and the desire to maintain a conservative capital structure, we involved three private equity firms and management in raising USD 460 million in equity. The starting capital structure also included a USD 75 million loan senior secured loan, USD 475 million second lien bond and the seller provided USD 200 million of seller’s credit. The transaction price was USD 1,050 million.
What we acquired was essentially a fleet of assets along with an offshore workforce and a shore-based management team that we “hand-picked” from Transocean. This was a complex carve out transaction as the seller organized their business geographically and not by product or business lines. The result was that we had to build the corporate headquarters organization from nothing as well as create all the business systems to support the business, operations and all reporting requirements.
Since Shelf Drilling’s establishment in 2012, what have been its key milestones?
A key milestone was achieving independence from the seller organization in what was an immensely complicated business carve-out transaction. We were substantially independent at the end of year 1 and achieved full independence after approximately 18 months. Independence involved a full build out of all business systems, setting up of independent local operating entities and joint ventures where required, establishing legal compliance and corporate secretarial infrastructure for our global operations, IT infrastructure, financial reporting systems, procurement, AP and payroll across 14 complex geographies and all prerequisites for operations in these 14 different geographies.
Another milestone has been best in class operating performance. With our sole-focus on shallow water operations, we saw a step change in operating performance and the companies operating performance has continued to improve since inception. In 2015, our total recordable incident rate (TRIR) was 0.22 versus on industry average of 0.6. Our lost time injury rate (LTIR) was 0.0. Uptime performance is averaging 99%, almost all service projects were completed on time and within their prescribed budgets.
The third milestone is our industry leading contracted backlog. The company’s firm contracted backlog continued to grow from company inception through to the middle of 2014, reaching a high of almost three times the backlog at the closing date. The backlog to-date remains substantially higher than what it was on closing date. We have executed approximately USD five billion in new contracts since the company inception.
Fourthly, we have had three years of solid financial performance. EBITDA (Earnings before Interest, Depreciation, and Amortization) were less than USD 200 million from our fleet of assets when we acquired the business. Again, due to our sole focus, we have been able to significantly deliver outstanding growth. After the first year under Shelf Drilling, the EBITDA had more than doubled to reach USD 460 million; the second year, it was USD 540 million.
I am also very proud that we have managed to build a strong, motivated workforce, with an extremely strong performance culture. This is in large part due to the fact that our rig employees felt that they were working at a place that values their work, their assets and sees it as the core of the company. Rig performance improved significantly. The excitement and pride that people have in working for a promising new company is palpable.
Starts-ups are notoriously difficult to establish and grow, so what would you say explains Shelf Drilling’s success so far?
We were very clear from the onset on what we wanted to be, we would focus on the jack-up operations we had no intention of entering the floater and deepwater markets. We quickly established a simple strategy based on being “fit-for-purpose” which means that our assets were ideally suited to the operating environments in which we work and ideally suited to the customer well profiles. We were quick to establish a performance based culture.
Performance is also about engendering competition amongst our fleet and geographies. Naturally, all safety incidents are taken very seriously, but our operational teams also feel bad about any operational hiccups, and this further motivates them to pursue excellence. There is some healthy competition between our rigs and even competitor rigs in the same location.
Creating a performance culture is also about eliminating unnecessary bureaucracy and maintaining a flat organization. This is something that building our company from scratch has allowed us to do. We only have two layers: Dubai, and the field.
In such a competitive landscape, what differentiates Shelf Drilling from other rig contractors?
What we are pushing ourselves to do is “Perfect Execution” in well delivery. The industry looks at safety and uptime which are the primary industry Key Performance indicators. But with our current uptime standards, there is not that much room for us to improve! We are constantly seeking to challenge ourselves and so we are looking at the other key aspect of performance – well delivery.
The ultimate goal for exploration and production (E&P) companies, especially in today’s economic environment, is to try and do more with less: drill and complete a well in a smaller time frame without compromising quality or any other goals they may have. This is something many drilling contractors have no vested interest in optimizing, because, in a way, doing more with less means creating less work for the future. But the right way to think about this is that we are creating huge value for our clients, which brings repeat business.
For example, we work with one of our major clients on their operations in South East Asia. In 2015, on our two rig operations, our client averaged drilling a 12 thousand foot deviated well in just 5.7 days. This level of performance can only be achieved by optimizing rig operations and design. For instance, during well drilling operations, there are many flat spots that interrupt normal drilling, when we have to do logging and run casing, among other things. Working as a team, the Client, our rig crews and service partners continuously work on how to take many of these activities off the critical path. Our rigs were modified so that when we are drilling in one well bore, we are logging in another. Previously, these activities used to be done sequentially, so this change saves a lot of time and money.
Compared to the industry average globally, which is probably around 45-60 days, 5.7 days is simply phenomenal. This is something we are in discussions about with an operator here in the Middle East, who wants us to undertake similar operations.
In line with this idea, we are also open to the idea of performance-based contracts rather than straight, day-rate contracts. Ultimately, we are differentiating ourselves by redefining industry standards in terms of performance.
How has establishing Shelf Drilling in Dubai assisted in its growth?
Dubai was the logical location to establish Shelf Drilling as it was the center of our universe: we work in West Africa, North Africa, India, Southeast Asia, the Mediterranean and, of course, in the Middle East.
The UAE is a great place for business. The infrastructure is excellent, flight connections are easy and business processes are very simple and efficient. There are benefits to setting up a business here that makes it cost effective when compared to other locations such as the US and the UK. It is also a bonus that Dubai is a very livable city and people are willing to relocate here. We are also benefitting from the great oil and gas supply chain infrastructure here and are building our two new rigs here.
Even with the price of oil being at USD 30-40 per barrel, it is still a good business to lift oil in the Middle East. We are looking to further expand our presence in the Middle East and Dubai is an excellent regional base. We only established operations in Abu Dhabi in the last year and we are keen to pursue more opportunities with new clients in the UAE. Likewise, we are looking at extending our operations in Qatar and Saudi Arabia, and establishing new ones in the Middle East.
What is your vision for Shelf Drilling for the next few years?
Since its inception, Shelf Drilling has grown at a remarkable rate. In 2011, we were the third-largest global provider of jack-ups. Today, we are – by some margin – the largest, in terms of the number of rigs and size of operations.
We would like to maintain our basic standards of uptime and safety, but also to revolutionize industry standards with our concept of “Perfect Execution”. This, coupled with a gradual shift to a business model based around performance contracts, is what will differentiate us from our competition and allows us to provide maximum value to our clients.
It is one thing to run a company where the reins have simply been handed to you, but Shelf Drilling is something that we as a team have created ourselves. It is a rare opportunity to be able to build something that truly is your doing, and I am very grateful to have had this opportunity! We are very motivated to continue to explore ways of differentiation through our image of “Perfect Execution”. Sustainable differentiation will be the critical factor to Shelf Drilling’s continued success.