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Interview

with Troy Campbell, CEO, Easternwell Group

18.02.2011 / Energyboardroom

Easternwell Group notably diversified its services from its traditional well servicing business into a wider suite of oilfield operations circa 2004. Being a little before the current resources boom, what was it that you saw in the market back in 2004 that drove the diversification?

The diversification mainly grew on internal services. We were starting to experience rapid growth from 1999-2000 and onwards based on two things: the coal seam gas (CSG) industry was starting to get legs and oil prices were beginning to climb which prompted much exploration. With the industry being so small in Australia we really had to step up and build platforms for ourselves to be able to grow off.

A growing industry – a rising tide – lifts the performance of every company involved. To what extent has your recent success been market driven and how much can you attribute to your own internal processes and differentiating services?

Majority – about 90% of our growth – has been off requirements of the market getting larger and more wells getting drilled; the rest has been through internal services. Our services internally began expanding which we now do for other service providers such as our competitors, but also for our key clients. We do a broader range of scope than other contractors in this space.

You referenced the industry as being small. It has also been described as segmented between big multinational players focusing on deepwater, offshore oilfield servicing with indigenous Australian companies focusing on land-based fields. What is the landscape in your eyes and where does Easternwell fit in?

Up until the industry slowdown in North America two years ago majority of the work done was indigenous – Australian contract companies that were growing through the cycle. With the amount of publicity of the downturn in the North American market there is a new group of service providers looking at Australia as a platform of growth to diversify away from Canada and the US. As a result we have seen increased competition enter over the past 2-3 years. One competitor in specific has been successful being awarded a major contract and they are building a platform going forward. Majority of the rest have put their toe in the water but so far have not been successful in entering the market in some form or fashion.

In addition to the downturn many companies are investing in Australia because it is an attractive market when considering its low sovereign risk and enormity of resources. Do you think that such attractive conditions can create a false sense of optimism for foreign entrants?

There are a few points around the false optimism of entry into the Australian market. First, foreign companies are entering a very restricted market. Services that are available in North America are not available in Australia. There is also a complexity around the logistics and management of operations. When we go to do work in Australia it can be very logistics focused having to move people, camps, food, and perform broader scope of services. Specifically talking to the services that Easternwell Group does, they are always underestimated to some degree. The key factor, however, is the staffing requirement. The pool of people that we have experienced in our services in Australia is extremely small. In North America, from a rig perspective, the labor force is thousands of times larger than what we are in Australia. The volume of people who can crew rigs and do the job is significantly different. We are Australia’s major well servicing and drilling provider from a staff perspective with 400 specialized people, but still minimal compared to the tens of thousands in North America. Companies are looking for the ability to come to Australia and crew with experienced personnel and not have a fly-in, fly-out sense culture. You can do that for a certain period of time but you then reach a stage when you have to stand alone and continue on.

The equipment is the same, ultimately, but it is around the logistical management side and being able to crew up where companies need to grow.

Is the equipment really the same?

The equipment is similar. At the end of the day we are drilling a hole in the ground. We specifically design our equipment to be road compliant for weights and measures which brings a certain degree of added complexity. What it does result in is that equipment has to be purposely built for Australia. The North American entrants cannot just bring a spare rig to Australia because legislation requirements and road regulations inhibit certain operations.

Obviously being an Australian contractor we know the conditions quite well. We specifically design our kit to be compliant to local regulations, but with the restrictions in work crews we innovate the rigs and design the equipment to have the least amount of people operating them. We limit the interface between man and machine to take the risk of people hurting themselves out of the equation. We also want to design equipment that people are motivated to work with.

Several junior exploration and production companies have bemoaned the lack of the quality rigs for onshore work, even going so far as to describe Australia as an “elephant’s graveyard” of onshore rigs. Is this an accurate narrative? What do you think accounts for this description?

No, it is probably very inaccurate to a degree. I can understand their view, but in Australia if a junior explorer wants to drill 5-10 wells then the capital expenditure for a new advantage style rig that we build will be approximately $15-20 million. It is very difficult for a junior to proceed with that project with new equipment and its associated costs. The newer technology and equipment is being deployed on long-term contracts with the majors. It becomes a “chicken and egg” scenario so juniors start off with older equipment and as their projects and scopes become bigger they move to newer rigs. Again comparing to North America, while a junior there will have access to better equipment for shorter programs it is difficult to produce the same in Australia.

How steep was the learning curve diversifying into other suites of operations from your traditional well servicing business?

The history of us at Easternwell was originally well servicing and then we moved into the drilling market. We struck a deal with a private equity firm in December 2009 which allowed us to merge into a broader group which does mining services and dewatering processes for iron ore and uranium. Before that we were specifically a well servicing and energy drilling company. The suite that we diversified into were organic services that we needed to do ourselves such as catering, crew changes for our aircraft, and logistics which gave us the ability to provide a better service to our clients.

Our main focus is on production. Regardless of the mine site – uranium or maintenance of a CSG well – our focus is to fix ourselves on production rather than exploration. Whether it is a hole in the ground or an open cut mine the commitment has been made to continue production which mitigates the volatility of cycles for us. If you are purely an exploration driller or highly focused on oil wells that only get drilled over $80 per barrel, then you face a lot of peaks and troughs in your cycle. We like to be mainly production focused with an element of exploration as a lead-in to the next phase of development.

How have you been able to utilize synergies both internally with your expanded operations and across the larger Transfield Services Group?

With the integrated service packages and different areas we are now in we have grown our business to be able to cross sell opportunities. That then leads to the Transfield Services buyout in December 2010. Transfield Services is a maintenance and services provider across the industrial spectrum with a large focus on energy. As Easternwell is production focused on the mining and energy side, we are the people who are “there first.” Before the acquisition Transfield Services was responsible for the later cycle maintenance of plants and processes. The new restructured group now gives us access to be at the front and tail end of projects.

That must have been a tough decision for a long-time family owned company to get bought out…

Yes, it always is. But eventually it becomes part of the growth curve. Our business is capital intensive and we need new ways to be able to keep the growth going. There is a certain requirement you reach when you can do it privately and still maintain a desired level of growth. But a couple of years ago we decided that we were going to be facing extended growth than what was previously predicted so I wanted to make sure that our business was in the position to deliver on the projects that we had opportunities to capitalize on.

How much more do you need to grow into with your services? What is currently lacking in your offering?

There is somewhere in between the first and second part of our business within the new Transfield Services Group that is currently lacking. There is a suite of services happening on site that we today are not involved in and a section where the original Transfield Services business gets involved in. There exists a suite of services in that gray area where we believe opportunity exists over time to get bigger chunks of projects.

Who do you identify as your core competitors?

We are very unique in the Australian market with our diversity across different industries. From an energy perspective there is perhaps not one specific competitor, but more so a suite of new entrants from North America who we compete with. But to be quite honest we are fine with that. It gives us an opportunity to stand out from the group.

Which are the main regions and markets of growth going forward for Easternwell?

The eastern states are where we see most of our growth with CSG or coal development. Western Australia is a big part of our business and we do see growth there, but a little more subdued than the projects in the east, based on today’s information. We are currently consolidating the group and making sure that what we have contracted here is going to be best in class.

Easternwell also prides itself on its long-terms strategy for developing operations in clean energy industries. Legislative delays and mooted discussion around renewables suggest that they are still very much the industry of the future. Are you having to make tough decisions now for future investments when such a boom is going now in resources?

We have structured our business to make sure that we are focused on the newer clean energy sources going forward with are our major operation in that area being carbon sequestration. We give that area as much focus as we can despite still being in infancy stages. We dedicate resources to work those systems and make sure we are there. Some of those projects have been sidelined at the moment but we are confident that they will be back at some stage in the near future.

What are the main challenges that you are encountering in running the business?

The main difficulties will be around personnel. We have a limited supply of people and as these projects grow requiring more people, there will not necessarily be an impact on the bigger companies not being able to get people, but the problem will expand to become a community and social issue. There are an extra 6,000-7000 people required to staff these projects and we have strict immigration policies and challenges in that operation. At Easternwell we have been working diligently for the past several years making sure that we are training and retaining our people. We call it the “soft side” of the business compared to the “hard side” of our equipment and manufacturing. We place a strong emphasis on lifestyle in the field. We offer fantastic camp accommodations which we build ourselves, catering, telephone and internet for our workers to contact their families, and having our own aircraft gives us the ability to fly our personnel in from the rigs out to the base. The soft side attracts people to us but also helps us to retain talent since it is very hard to replicate.

Your father founded this company. What has been your unique touch being in the second generation of management?

The second generation touch is being able to see where the industry is going. As the industry changes and it actually becomes an industry rather than a small operation, we need the vision to make sure we are investing in our people, innovating, and being seen as the cutting edge type of operation.

The oil and gas industry is driven by milestone and timetables. What is driving your agenda over the next 5-7 years?

Now that projects are reaching final investment decision the big thing for us is seeing projects get going over a reasonable amount of time rather than just in spikes. It is great if you can process a startup without bottlenecks, which will always be a challenge. There are quite a few projects out there and everyone is talking growth. It is all about being able to proficiently manage which projects we want to do.

Is there any particular dream project you think especially caters to Easternwell?

We are going to be consistent players in the CSG-to-LNG projects. We have been there since Day One 20 years ago aiding The Commonwealth Scientific and Industrial Research Organization with its first coal bed methane projects in Australia. From an energy side CSG-to-LNG are the main projects that we want to be focused on. But while CSG is the hot topic at the moment, we see a lot of growth across other industries that we are involved in.

Are there any final messages that you would like to convey to our readers about Easternwell Group?

Our merger with Transfield Services is a great opportunity to take the business through the next phase of its growth cycle. We have a tremendous business from the Transfield Services side that has been in Australia for 50 years. Getting together with us lets us take a strategic view of the Australian market and drive it forward.

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