1 M8.3 Case Study – Pacific Drilling Group 2: Jerry Alexandre, Heather Finley, Julian Murphy, Rafael Morales-Rojas, Rachel Darrow Excelsior College BUS341: Management Concepts and Applications Dr. Jan Tucker December 18, 2022 2 M4.3 Case Study – Pacific Drilling Abstract Pacific Drilling entered the offshore oil drilling industry in 2006 promoting newer technology that was safer and more efficient. However, the company’s narrow portfolio of products and high start-up costs limited its growth. So, when the oil market began to decline in 2014 due to an overabundance of oil supply and drilling rigs, demand for upstream services decreased and further limited opportunities for new drilling. This put Pacific Drilling in serious financial trouble. As the oil market finally starts to recover, Pacific Drilling will need to reevaluate its internal costs and offer products and technologies that expand beyond its niche market if it hopes to continue doing business in the long term. 3 M8.3 Case Study – Pacific Drilling Pacific Drilling was established in 2006 through the purchase of a drillship under construction and the company went public in 2011. Pacific Drilling’s principal business objective was to be the oil and gas industry’s preferred provider of high-specification, floating rig drilling services (Pacific Drilling S.A., 2015). By 2015, Pacific Drilling had quickly increased their fleet size to seven operating drillships. This came at a large cost through major debt and equity raises. Pacific was focused on a specific segment of the floating rig market, with rigs capable of drilling in depths up to 12,000 feet (Pacific Drilling S.A., 2015). Pacific Drilling partnered with Chevron in its early days and this concentration problem remained for many years. In December 2015, three of the four working drillships were under contract with Chevron (Pacific Drilling S.A., 2015). Compounding this problem was Pacific Drilling’s small fleet size. Pacific Drilling experienced turbulent financial times following the 2014 downturn in the oil market. From 2016 through 2021 they filed for bankruptcy twice and conducted two reverse stock splits. Operating Environment The price of crude oil declined from a near-record high of $114 in June 2014 to $28 in January 2016 (Macrotrends, 2022). As crude oil prices declined, so did the demand for offshore drilling and upstream services. In 2016, Pacific Drilling estimated 34-38 high-specification drillships were available without firm contracts with another 43 scheduled for delivery by 2018. (Pacific Drilling S.A., 2015). There is no substitute for oil, and it is prone to large swings in price often affecting the global economy (Walsh, 2012). Pacific Drilling was clearly affected by this downturn, reporting in December of 2015 that three of their seven drillships did not have contracts, and a fourth drillship had a contract expiration approaching (Pacific Drilling S.A., 4 2015). In addition to the large swings in oil prices, the BP oil spill also discouraged some energy companies from offshore drilling. Due to oil busts, poor industry performance, and environmental concerns, companies have reduced deep water exploration budgets and have a limited ability to seek Wall Street financing (Takahashi, 2022). Strategic Approaches The oversupply of rigs in the market, especially high-specification drillships, led to a significant reduction in daily rates and lower utilization, and Pacific Drilling’s leadership stated day rates may continue to decline. “Lower utilization and day rates could require us to enter lower day rate contracts or to idle or stack more of our drillships, which could have a material adverse effect on our financial position, results of operations or cash flows, and our ability to repay debt in the future” (Pacific Drilling S.A., 2015, pg. 8). “As a result of our relatively small fleet of drillships, we anticipate revenues will depend on contracts with a limited number of clients.” (Pacific Drilling S.A., 2015, pg.9). These two issues combined make it difficult for Pacific Drilling to decide between purchasing more drillships and possibly having them be idle or maintaining its small fleet and limiting the number of contracts that it can take on. For Pacific Drilling to increase revenue, the management needs to understand the present strengths, weaknesses, opportunities, and threats (SWOT) the organization is facing in its current business environment (Fern Fort University, n.d.). Strengths and weaknesses are the internal strategic factors, whereas opportunities and threats are the external strategic factors. A SWOT analysis will help Pacific Drilling develop its strategic approach. Pacific Drilling has a strong track record of acquiring technology companies, which initially enabled the development of highly specific technologies and products for its target 5 market (Fern Fort University, n.d.). This investment in technology embedded automation in a lot of its processes, which not only produces consistent quality but also easily allows for up-anddown scaling of operations based on market conditions. Despite this fact, Pacific Drilling does not use its access to technology to its full advantage. The product range the company offers is relatively small, highly targeted, and has not changed in several years (Alex, 2020). This lack of newer product offerings can be attributed to a failure to successfully forecast new product demand, which has led to missed new opportunities and loss of potential market share beyond its current niche categories (Hitt et al., 2016; Fern Fort University, n.d.). Additionally, Pacific Drilling does not effectively market its products to showcase its unique value propositions, thus opening the company to external threats even in its core sector (Fern Fort University, n.d.). However, Pacific Drilling does have strong relationships with its dealer community and distribution networks. The company should leverage these relationships to build an internal feedback mechanism to help anticipate market trends and shifts, enter new markets to build revenue streams and diversify risk, and negotiate lower transportation and material costs with its suppliers (Fern Fort University, n.d.). Pacific Drilling should also continue to invest in technology so it can innovate or improve products and services for its current and future target markets. In that vein, the company should focus its technology investment efforts on reducing the cost of harvesting oil, expanding its sales channels via online services, developing quantitative metrics that provide value for Pacific Drilling and its customers, and keeping pace with or getting ahead of environmental regulatory requirements (Fern Fort University, n.d.). Market Competition Some of Pacific Drilling’s offshore drilling competitors include Ensco International, Ocean Rig UDW, and Noble Corporation (Comparably, n.d.). Many of the competitors have 6 developed newer technologies across a broader portfolio of offshore platforms (i.e., barges, jackup rigs, floaters, submersibles, etc.) giving them access to greater market share which can cause serious threats to Pacific Drilling in the medium to long term (Hitt et al., 2016). However, despite having some competitive advantage with regard to technology, none of the companies in the offshore drilling industry were immune to the 2014-2017 slump in oil prices. The downturn was due to an oversupply issue, which was attributed, in part, to the fracking boom (Hough, 2019; DiLallo, 2014). Fracking also shifted a significant portion of oil drilling efforts back onshore, as it is a much less expensive oil harvesting process (Hough, 2019). But now that the upstream services market is starting to slowly recover, it is those companies that have diverse offshore technologies and product offerings that are expected to also recover (Hough, 2019). Pacific Drilling attempted to create a niche market for itself by focusing on one type of offshore drilling technology but ended up inadvertently alienating itself from other potential markets. If the company has any hope of increasing its revenue, it needs to leverage its relationships in the industry and invest in technology to diversify its product offerings so that it can enter new markets and appeal to other potential customers (Fern Fort University, n.d.). Also, like all other oil companies, Pacific Drilling has no input on how to price natural resources but it can control how much it spends when harvesting these resources, and reducing these costs will significantly help the company’s chance at survival (SUSE, 2022). Moving into the future, Pacific Drilling needs to reevaluate its internal costs and break out of the niche market if it hopes to continue doing business in the long term. 7 References Alex, H. (2020, May 18). Pacific Drilling - With only one rig left in operation, investors need to prepare for another debt restructuring. SeekingAlpha. https://seekingalpha.com/article/4348483-pacific-drilling-only-one-rig-left-in-operationinvestors-need-to-prepare-for-another-debt Coswell, M. B. (2009). The oil industry and windfall profits. Nova Science Publishers, Inc. DiLallo, M. (2014, December 30). Offshore drilling: What to expect in 2015. The Motley Fool. https://www.fool.com/investing/general/2014/12/30/offshore-drilling-what-to-expect-in2015.aspx Fern Fort University. (n.d.). Pacific Drilling S.A. [SWOT analysis] weighted SWOT matrix. Retrieved December 6, 2022, from http://fernfortuniversity.com/termpapers/swot/nyse/342-pacific-drilling-s-a-.php Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2016). Strategic management: Concepts Competitiveness and globalization (12th ed.). Cengage Learning. Hough, J. (2019, March 9). Offshore oil drilling stocks are energy bargains. Barron’s. https://www.barrons.com/articles/offshore-oil-drilling-stocks-are-energy-bargains51552093202 MacroTrends. (2022). Brent crude oil prices - 10 year daily chart. https://www.macrotrends.net/2480/brent-crude-oil-prices-10-year-daily-chart Noble Corporation. (2021, December 31). Noble Corporation form 10-K. Noble SEC Filings Details. https://www.noblecorp.com/investors/reports-and-filings/sec-filings/sec-filingsdetails/default.aspx?FilingId=15580904 8 Pacific Drilling S.A. (2015, December 31). Pacific Drilling form 20-F. Securities Exchange Commission Archives. https://www.sec.gov/Archives/edgar/data/1517342/000151734216000062/pacd20f2015.htm Pacific Drilling S.A. (2019, December 31). Pacific Drilling form 10-K. Securities Exchange Commission Archives. https://www.sec.gov/Archives/edgar/data/1517342/000155837020002571/pacd20191231x10k.htm Randles, J. (2020, November 3). Pacific Drilling wants second Chapter 11 to be its last. Wall Street Journal. https://www.wsj.com/articles/pacific-drilling-wants-second-chapter-11-tobe-its-last-11604420380 SUSE. (2022, May 20). Pacific Drilling reduces operating costs and doubles SAP HANA capacity with SUSE. https://www.suse.com/success/pacific-drilling-2/ Takahashi, P. (2022, May 2). Gulf of Mexico oil drilling makes too-little, too-late comeback. Bloomberg. http://vlib.excelsior.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&d b=bth&AN=156625464&site=eds-live&scope=site Taylor, G. (Ed.). (2011, November 11). Pacific drilling launches IPO as new ultra-deep-water contractor. S&P Global Commodity Insights. https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/111111pacific-drilling-launches-ipo-as-new-ultra-deepwater-contractor 9 Verleger, P. K. (2020). Today: Dominance denied: How America’s pursuit of energy domination destroyed the oil industry. The International Economy, 34(3), 46–63. http://vlib.excelsior.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&d b=bth&AN=146412455&site=eds-live&scope=site Walsh, B. (2012, April 9). The future of oil. TIME Magazine. http://vlib.excelsior.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&d b=ulh&AN=74004613&site=eds-live&scope=site
