Varco International, Inc.

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Varco International, Inc.

743 N. Eckhoff Street
Orange, California 92868
U.S.A.
Telephone: (714) 978-1900
Fax: (714) 937-5029
Web site: http://www.varco.com

Public Company
Incorporated: 1908 as Abegg and Reinhold Company; 1937 as Pacific Tubular Inspection Company
Employees: 6,660
Sales: $866.6 million (2000)
Stock Exchanges: New York
Ticker Symbol: VRC
NAIC: 213112 Support Activities for Oil and Gas

Varco International, Inc. primarily serves the oil and gas industries, with a presence in every major oilfield of the world. Maintaining dual headquarters in Orange, California, and Houston, Texas, the company has operations in 49 countries spread across six continents. Varco is divided into four business groups. The Drilling Equipment Sales group offers a variety of equipment used in drilling rigs, both offshore and on land, including equipment used in rotating and handling drillpipe, a complete line of standard drilling rig tools, hoisting equipment, and pressure control and motion compensation equipment. The Tubular Services group sells products that coat the inside of pipes and tubes used in drilling and pipelines in order to prevent corrosion and leaks. The group also provides inspection and quality assurance services for tubular goods used in the oil and gas industry. In addition, it inspects tubular products used in steel mills and sells high pressure fiberglass tubular goods. Varco’s Drill Services group supports drilling operations by providing advanced equipment that monitors drilling rig instrumentation. The Coiled Tubing & Wireline Products group sells coiled tubing equipment and the supporting equipment that goes with it.

Varco’s Origins: 1908

For decades Varco was purely a products company, but in 2000 it joined forces with service company Tuboscope to create a more dynamic business. In the merger of equals it was actually Tuboscope that issued the stock to purchase Varco, but Varco’s chief executive, George I. Boyadjieff, took over as chairman and CEO, and Tuboscope subsequently assumed the Varco International name. Originally “Varco” was a trademark of the Abegg and Reinhold Company, founded in Los Angeles in 1908 by two Swiss engineers, Baldwin Reinhold and Walter Abegg. They were lifelong friends who both attended the Polytechnic Institute of Zurich, where they earned degrees in mechanical engineering with an emphasis in metallurgy. At a time when Hollywood was just a sleepy village and most American movies were being filmed in the New York City area, the two men gravitated to southern California. They offered metallurgical and engineering services and also made small hand tools that were primarily used in mining and the nascent automobile industry. In order to strengthen the metal tools, the engineers created their own heat-treating plant in 1909 and were among the first to introduce heat-treated parts to the California oilfields. In fact, Reinhold would be tabbed by many as the father of oilfield metallurgy.

In the early years of the 1900s, drilling techniques were moving away from a reliance on hand tools to the use of far more sophisticated drive tools and derricks. Rotary drilling was introduced and as the technology was refined it gradually replaced cable tool drilling. Abegg and Reinhold already provided rig repair services as early as 1912. In order to fund expansion the founders turned to friend Edgar Vuilleumiere for backing. By 1915 the company’s oil industry products began using the “Varco” trademark, which stood for Vuilleumiere, Abegg and Reinhold Company. With the discovery of the major oil field at Signal Hill in southern California in 1921, the company began to focus on manufacturing rotary drill products. Over the ensuing decades the company would sell outside of the Los Angeles area and achieve an international reputation for Varco products. In 1973 the company changed its name to Varco International, Inc. By then, Reinhold had been succeeded by his son, Walter B. Reinhold, as well as Boyadjieff, who joined Abegg and Reinhold in 1969.

In 1975 Varco made an initial public offering of stock with the primary purpose of paying down debt. For the next five years the company enjoyed flush times as the oil industry boomed: revenues grew fourfold to $108.6 million while net income tripled to $11.9 million. In 1981, at the peak of the oil boom, Varco posted even more dramatic gains. It earned $22.3 million on revenues of $193.7 million. In Orange County alone there were five other thriving oil equipment manufacturers, but as oil prices fell and drilling activities dwindled, equipment sales became virtually nonexistent. In 1981 there were approximately 4,000 oil rigs in operation, but in 1987, a year after oil prices collapsed completely, there were little more than 900 in operation. Varco was the only Orange County oil equipment manufacturer left intact.

Varco’s survival was the result of Reinhold refusing to cut back on research and development (R&D) at a time when retrenchment was the order of the day and R&D was seen as a ready target for budget cuts. In 1980 a major offshore drilling customer asked Varco to help in developing a better drilling system. With plenty of cash available, Reinhold accepted the challenge. When the oil industry began to stagger two years later, and for the first time in company history Varco saw its customers cancel orders (worth some $60 million), the decision to keep spending on R&D was a much tougher one. Reinhold was convinced, however, that what the company was developing would prove to be revolutionary. It was called the Top Drive drilling system, which placed an electric motor at the top of the drill stem rather than on the floor of the drilling rig, thus allowing far greater flexibility in removing drills and the ability to drill extremely deep or sharp-angled holes. Increased efficiency translated into significant savings, estimated to reduce the cost of drilling by as much as 40 percent, making Top Drive a product especially suited for hard times. Although more R&D spending would be required, Top Drive was introduced in 1982, a year in which Varco would lose $17.2 million and be in danger of defaulting on loans. To support the project and keep the company afloat, Reinhold was forced to take drastic steps, laying off more than 1,000 workers, instituting pay cuts, selling off equipment, and closing down sales offices around the world. Varco actually stepped up its R&D efforts, as it not only developed four new models of the Top Drive offshore drilling systems, it introduced an onshore system that automated pipe handling and drill retrieval.

Returning to Profitability: 1988

Top Drive sales would soon take off. After years of losing money, the company finally returned to profitability in 1988. Revenues totaled $69 million, a far cry from the nearly $200 million generated in 1982, but a significant improvement over 1987 when revenues reached bottom, totaling just $37 million. Varco also undertook a number of initiatives that significantly lowered its debt. Although Top Drive was vital in Varco’s survival, it was important that the company not become overly dependent on the product, which at one point accounted for 75 percent of all sales. To help diversify its business, Varco acquired two units from Baker Hughes International in a $23 million deal: BJ Machinery manufactured drilling equipment, while Technical Drilling Tool provided marketing and sales expertise.

Varco made further acquisitions in the early 1990s that resulted in mounting revenues, which increased from $132 million in 1990 to $341.4 million by 1996. In May 1990 it acquired the Martin-Decker Division from Cooper Industries for $29.3 million. With manufacturing facilities in Houston and Marshall, Texas, Martin Decker produced pipe handling equipment and measuring and monitoring devices. In November 1990, Varco bought the assets of the TOTCO division of Exlog, Inc., in a deal that included stock and $20 million in cash. TOTCO also had roots in southern California. Joseph B. Wood founded the Technical Oil Tool Corporation in 1929 to manufacture a device that would determine if oil drilling was deviating from vertical. In the oil industry, any drift recorder would soon be referred to as a “TOTCO.” Over the years, the company developed other recording devices. After purchasing the company, Varco combined it with Martin-Decker to create the M/D TOTCO Instrumentation Division.

Varco continued its external growth in 1992 when it paid $36 million in cash for the Shaffer product line of Baroid Corp. The company was founded in southern California in 1928 by William D. Shaffer as the Shaffer Tool Works. Starting with the flow bean valve to prevent blowouts, Shaffer patented a number of devices for use in drilling operations. The company remained in family hands until 1968 when it was purchased by the Rucker Corporation. Ten years later it was sold to NL Industries, becoming NL Shaffer. It prospered for several years until the oil bust of the 1980s, at which point it dramatically downsized its worldwide operations. NL Industries restructured its operations in 1988 and spun off Shaffer, which then became a subsidiary of Baroid. For Varco the addition of Shaffer’s pressure control equipment complemented its other drilling support products.

Company Perspectives:

We shaped this company over the course of several decades, building upon the inspiration and perspiration of scores of technical geniuses who each excelled at a critical core competency .

Varco is literally the product of myriad companies whose technologies and talents have been fused into a single, synergistic powerhouse that is the global leader in virtually every product and service we offer .

In 1994 Varco bought Thule Rigtech, a division of Rig Technology Limited, for approximately $9 million. The British acquisition manufactured equipment used in drilling through mud, and further filled out Varco’s slate of drilling rig components. Adding to its operations was a strategy that paid off for the company. It prospered and was debt free by the late 1990s. A downturn in oil prices, however, resulted in a decreased demand for its products. Revenues in 1999 fell 32 percent, from $567.7 million in 1998 to $385.5 million, and the company lost $7.2 million after posting net income of $53.1 million and $41.9 million the previous two years. Although extremely healthy, Varco took precautionary measures, including the slashing of its workforce by 25 percent. Then in March 2000 it announced that it had agreed to merge with Tuboscope in a stock deal worth $834 million. Because the two businesses complemented one another, the new entity would offer a broader range of products and become one of the major oilfield service and equipment companies in the world, boasting a market capitalization in the range of $2 billion.

Founding of Tuboscope: 1937

Tuboscope was founded as the Pacific Tubular Inspection Company in 1937 by a German immigrant named Fritz Huntsinger. While running a tool company, he was approached by the Shell Oil Company to help it detect faulty drill pipe. Having fought in World War I, Huntsinger was familiar with Optiscopes, German-made devices used to inspect the interior surface of cannon barrels. He promptly imported a pair and adapted them to a new function. Huntsinger then held an employee contest with a $25 prize for coming up with the best name for the new device. In the end he combined two entries, “tubo instrument” and “scope instrument,” to form “tuboscope.” It quickly became standard drilling equipment. The company also developed a method for coating the inside of pipes to prevent corrosion and increase working life. Tuboscope’s technologies were so important that during World War II its employees were exempt from the draft in order to ensure that the company would be able to help maintain the flow of oil so vital to the war effort. Having expanded to service the Texas oilfields, Huntsinger sold out to area employees, who created the Tuboscope Company of Texas. Pacific Tubular later became Vetco Services and moved its operations to Europe.

In 1963 American Machine and Foundry bought Tuboscope and kept it as a subsidiary until 1985, when AMF was acquired by Minstar Inc., a Minneapolis-based moving and storage business. Although Minstar originally planned to sell off Tuboscope, it held onto it because of the cash flow the unit generated. In 1985 Tuboscope had $176 million in revenues. By 1988, however, Minstar elected to focus on what had become its main business, the manufacture of pleasure boats. It sold Tuboscope to Brentwood Associates, a Los Angeles investor group, in a $142 million leveraged buyout. In March 1990 the company went public to reduce its debt by almost $50 million. A year later it acquired Vetco Services, its parent company (albeit, 50 years removed) for $50 million in cash and stock. The deal increased Tuboscope’s presence overseas, where most of the future growth in drilling was expected to take place. Vetco was based in Germany and had operations in more than 30 other countries. In 1992 Tuboscope would change its name to Tuboscope International Corporation.

Saddled with high debt, Tuboscope attempted in 1993 to sell itself to Weatherford International, another drilling-related company, but the deal fell through. With a decline in international drilling, the company was forced to restructure its operations and lay off employees. A year later Tuboscope hired Goldman, Sachs & Co. to help it maximize shareholder value, with the possibility of selling all or part of the company. In January 1996 the company acquired Drexel Oilfield Services in a stock deal worth over $100 million, but as part of the deal Drexel’s largest shareholder, SCF Partners, took control of the combined companies. In turn, Tuboscope received over $30 million in new capital from SCF partners. Under its new management the company initiated an aggressive acquisition strategy. In 1996 it bought seven companies, followed by 11 in 1997 and five in 1998. In 1999 it announced a stock swap to acquire Newpark Resources Inc., a deal that management hoped would allow Tuboscope to offer an array of integrated services to drilling operations. When Tuboscope was unable to arrange suitable financing to support the combined company, it eventually scuttled the deal in November 1999, with only some operational alliances with Newpark to show after months of effort.

A few months after the failed deal with Newpark, Tuboscope would find a new partner in Varco, one with $75 million in the bank and no debt. This time the merger would come to fruition. Varco management took over the new combination of businesses and in March 2001 was adding even more to its portfolio when it bought the oilfield services of ICO for $165 million. Clearly, Varco was broadening its range of services and equipment manufacturing, but it remained very much dependent on drilling activity, which itself was a function of the worldwide price of gas and oil. The cyclical nature of those prices would continue to dictate the fortunes of Varco, no matter how large the company might grow.