TODCO

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TODCO

FOUNDING OF PREDECESSOR COMPANY: 1935

READING & BATES MERGING WITH FALCON DRILLING: 1997

ADOPTION OF TODCO NAME: 2002

FOUNDING OF PREDECESSOR COMPANY: 1935

TODCO’s roots date back to the Great Depression of the 1930s when two true pioneers of the oil and gas industry, J. W. “Jack” Bates, Sr., and George M. Reading, became partners. Bates came west to California after receiving a degree from Dartmouth College, starting out in the oil industry at the lowest ranks, working as a mule skinner. Reading was a University of California-educated mining engineer. The two men met in Texas in 1930 when Bates was general superintendent for Rox-anna Petroleum, which later took the name Shell Oil Company, and Reading was one of his drilling contractors. In 1935 they became partners, forming Tulsa, Oklahoma-based Reading & Bates Drilling Co. with three drilling rigs they acquired on credit. The company enjoyed steady growth drilling contract wells in Oklahoma, Texas, and Kansas. In 1949 Jack Bates, Jr., took over the presidency, then two years later took on a partner of his own, Charlie Thornton, a former Gulf Oil petroleum engineer who headed a Canadian subsidiary. In 1955 they incorporated Reading & Bates Offshore Drilling Co., a subsidiary that would one day become part of TODCO. Its rigs operated in the Gulf of Mexico as well as the Persian Gulf in the Middle East. The company became one of the first drilling contractors to work in the North Sea, and in the late 1960s began growing its fleet and adding capabilities, such as pollution control technology and ocean engineering.

Reading & Bates continued to operate land rigs in Iran, but in the late 1970s the Shah was overthrown in a revolution and the equipment was confiscated. Having lost most of its land rigs, Reading & Bates simply exited this part of the business. The company was involved in exploration and other areas, but following the collapse of the oil and gas industry after the price of oil fell to the $8–$10 per barrel range in 1986, Reading & Bates undertook a restructuring. In 1989 it moved its headquarters to Houston and by 1991 divested most of its assets in order to concentrate on offshore drilling contracting, especially deepwater and difficult environments. A new unit was also formed in 1990, Reading & Bates Development Co., to provide floating production platform services and other specialized drilling services as well as to invest in wells the company drilled.

The decision to focus on deepwater drilling was made in part because oil prices were rising in the early 1990s, making it economically viable for oil companies to drill in deepwater, which was a more costly endeavor. Moreover, many of the most promising energy plays left to exploit were located in the deepest parts of the ocean. At the time, offshore contract drilling was a highly fragmented field, so much so that the top three companies controlled little more than a quarter of the market. Oil producers, as a result, were in an enviable position, able to take advantage of any dip in oil or gas prices to demand a reduction in the day rate of drilling rigs. If the contractors tried to grow their business by building more rigs, they only added to the total number of rigs available, worsening the supply/demand imbalance. Hence, the wisest course of action was to acquire competitors’ rigs, and in the mid-1990s there was a great deal of consolidation in the field. Sonat Offshore tried to acquire Reading & Bates but was rebuffed. Reading & Bates tried to acquire Norway’s Transocean ASA but lost out to Sonat. The two companies merged to become Transocean Offshore.

READING & BATES MERGING WITH FALCON DRILLING: 1997

In 1997 Reading & Bates found a willing partner in Falcon Drilling Company, whose chief executive, Steven A. Webster, was a longtime friend of Reading & Bates’s CEO, Paul Loyd. They became acquainted at Harvard Business School, where they both graduated in 1975. They then worked together as consultants in Saudi Arabia and became partners in some small ventures. In 1988 Webster founded Falcon as an offshore drilling contractor. He grew the business rapidly, focusing on shallow water, and took it public in 1995. By the time it merged with Reading & Bates, Falcon operated the largest fleet of barge rigs in the world, and was worth $1.6 billion.

In July 1997 R&B Falcon Corporation was formed to accommodate the $2.5 billion stock swap, which in order to avoid taxes was structured as a pooling of interests. The two partners were considered a good fit because there was little overlap in their activities, with Reading & Bates focusing on deep water and Falcon on shallow water. The previous year, Falcon did about $319 million in business while Reading & Bates posted revenues in the neighborhood of $290 million. Combined they were large enough to finance the building of deepwater drilling ships, in high demand but which cost as much as $300 million to build. With Webster serving as CEO and Loyd assuming the chairmanship, the company looked to focus on drilling and to avoid taking equity in any of the wells it worked on. The Total Offshore Production Services (TOPS) unit of Reading & Bates Development had pursued an equity strategy, but the wells had not delivered, hurting profits of the parent company. In 1997 the unit spent $77.4 million on dry holes. Even before the merger was completed R&B Falcon began to talk about spinning off TOPS, but when oil and natural gas prices dropped the sale was put on hold.

COMPANY PERSPECTIVES

Our Vision: To be THE shallow water drilling contractor in the Gulf of Mexico and Caribbean Basin.

Despite the fall in oil prices, the company completed a major acquisition in 1998, using about $415 million in stock to acquire Cliffs Drilling Co., a contract drilling company that operated 16 jackup drilling rigs, 11 land drilling rigs, and three platform rigs along the Gulf Coast of Texas and Louisiana, and in Venezuela. The company also offered engineering services and operated in the Middle East. By the end of 1998, low oil prices began to hurt R&B Falcon’s main business as oil companies began terminating rig contracts.

With the entire industry enduring tough times, R&B Falcon surprised everyone when it was able to complete a $1 billion bond offering. The funds were much needed, in light of the company’s $2.7 billion long-term debt load. More than half of the money raised was earmarked to refinance the debt. Webster had always been known as someone proficient in growing companies by taking on debt, but conditions were such that a more cautious approach was in order. Hence, in May he stepped down in what was described as an amicable parting and Loyd took over as chief executive while retaining the chairmanship. Webster stayed on as a member of the board and held the title of nonexecutive vice-chairman.

After the OPEC cartel cut production in 1999, commodity prices began to rise and in the summer of 2000 R&B Falcon was finally able to sell its exploration and production assets in the Gulf of Mexico, receiving more than $127 million from Enterprise Oil, a U.K.-based company. The company’s other production properties were also put on the block, but just a month later the entire company was acquired by Transocean Sedco Forex Inc. in a stock transaction valued at more than $5.8 billion, plus the assumption of $3 billion in debt.

Transocean had been the major player in the consolidation that had taken place in the offshore contract drilling segment. The company’s lineage dated back to 1953 when the pipeline company Southern Natural Gas Co. (SNG) acquired the DeLong-McDermott contract drilling joint venture and renamed it The Offshore Company. A year later the unit began operating its first jackup drilling rig in the Gulf of Mexico and, like Reading & Bates, was one of the first to work the North Sea in the 1960s. The company drilled its first deepwater well in Asia in the 1970s. The parent company changed its name to Sonat in 1981 and The Offshore Drilling Company became Sonat Offshore Drilling Inc. In 1993 Sonat spun off Sonat Offshore and by 1995 had sold all of its stake in the former subsidiary.

During the wave of consolidation that swept the offshore drilling business in the mid-1990s Sonat Offshore merged with Transocean to form Transocean Offshore in 1996. Transocean had been formed in the mid-1970s by a Norwegian whaling company that decided to diversify and became involved in semisubmersibles, self-propelled, seagoing barges that served as living quarters and a base of operations for offshore drilling operations. It was an especially attractive acquisition target because of its considerable North Sea assets. In 1999 Sonat Offshore became even larger when it merged with Sedco Forex Limited, the offshore drilling subsidiary of Paris-based Schlumberger Ltd. The Sedco component had been founded in 1947 as the Southeastern Drilling Company in the United States to operate in shallow marsh water. It later expanded to deeper water and was acquired by Schlumberger in 1984, and a year later it was combined with Forex. Established in France in 1942, Forex initially provided land drilling services in France, North Africa, and the Middle East. It became involved in offshore work through a joint venture with Languedocienne called Neptune. Forex eventually acquired complete ownership of Neptune, and in 1972 Schlumberger acquired all of Forex.

The combination of Transocean and Sedco Forex took the name Transocean Sedco Forex Inc. It instantly became the world’s fourth largest oilfield service company and was added to the Standard & Poor’s 500 Index on the first day it began trading on the New York Stock Exchange in 2000. With the acquisition of R&B Falcon, completed in January 2001, it grew even larger, becoming a $14 billion company.

KEY DATES

1935:: Reading & Bates Drilling Co. is formed.
1955:: Reading & Bates Offshore Drilling Co. is formed.
1988:: Falcon Drilling Company is founded.
1997:: Reading & Bates and Falcon merge to form R&B Falcon Corporation.
2000:: R&B Falcon is acquired by Transocean.
2002:: R&B Falcon is renamed TODCO.
2004:: Transocean spins off TODCO.

ADOPTION OF TODCO NAME: 2002

While Transocean achieved scale it took on considerable debt to do so. In the fall of 2002 Transocean announced that it planned to spin off the Gulf of Mexico shallow and inland water assets of R&B Falcon through an initial public offering (IPO) of stock, while keeping the deepwater assets, in order to pay down debt and hone its focus on the deepwater business. In preparation for this move R&B Falcon was renamed TODCO in December 2002.

The IPO was supposed to be held in early 2003, but because of a struggling economy it was postponed until February 2004. TODCO did not received any of the proceeds but gained its independence at a time when the market was undergoing a resurgence as oil and gas prices soared. Transocean steadily divested its interest in TODCO, selling the final shares by May 2005.

Serving as TODCO’s president and chief executive officer was Jan Rask who had been heading it as a Transocean unit since July 2002. He brought to the job considerable experience as a top executive with a number of contract drilling companies, including Arethusa (Off Shore) Limited, Marine Drilling Companies, Inc.; and Pride International, Inc.

In 2004 TODCO posted revenues of $351.4 million, a significant increase over the $227.7 million the prior year due to improved market conditions in the Gulf of Mexico. In 2005 the company reactivated seven rigs, six of them located in the Gulf, as demand for shallow water drilling rigs continued to grow. For the year TODCO generated revenues of $534.2 million and net income of $59.4 million. The company’s remaining deactivated rigs, six jackups and ten inland barges, were put into service in 2006 as revenues soared to $912.1 million and earnings more than tripled to $183.6 million. Because contract drilling was a cyclical business, such explosive growth was not likely to last for an extended period, but TODCO looked to exploit the fat times for as long as they lasted.

Ed Dinger