How to grow your oilfield service firm in the U.S.
CanElson, McCoy Corp. and BOS Solutions reveal their winning strategies
Operating in the western canadian Sedimentary Basin is nothing if not cyclical. The high peaks of activity are often offset by steep valleys and remaining profitable for 12 calendar months is no easy feat, let alone doing it year in and year out. “If you want to grow and not be cyclical, you have to step outside of Alberta,” says Jim Rakievich, president and CEO of McCoy Corporation, which manufactures drilling and completions equipment.
Stepping out of Alberta and into the American oil and gas market is a logical destination to expand a firm’s horizons. Proximity makes it less expensive than moving operations to the Middle East or Eastern Europe and familiarity with the culture should simplify learning the business environment. But the sheer size of the U.S. might be the best reason to look there for new business opportunities. According to the International Association of Drilling Contractors, the rotary rig report for the first week of October had 2,012 rigs in the U.S. compared to 522 in Canada. “The U.S. has the largest concentration of rigs in the world,” Rakievich says. “Globally it’s an important market.”
At the very least, the American oil and gas industry can serve as a proving ground for expanding into other foreign markets. “If you can’t expand into the U.S. and be successful, you can’t go to a more sophisticated and higher risk region and be successful,” says Glenn Leroux, president and CEO of BOS Solutions, a fluid management company that has been operating in the U.S. since 2007.
Below is a snapshot of three companies whose move south has paid dividends.
Founded as a blacksmith shop in Edmonton back in 1914, McCoy specialized in forging a variety of different steel products during the ensuing decades. At one point, McCoy was contracted to manufacture hydraulic tongs for use in the oil patch. It seemed like a promising business line, so McCoy acquired the company that developed the product 15 years ago.
Although McCoy had entered the oil industry, it wasn’t the company’s main business. Just four years ago, McCoy relied on the trucking industry to pay most of its bills by manufacturing parts for truck and trailer repairs. “We owned a truck dealer in Grande Prairie,” Rakievich says. “The majority of our revenue in Alberta came out of the repair shops and selling replacement parts.”
Despite the company’s diverse business lines, Rakievich saw the greatest potential for growth in oil and gas. But the majority of McCoy’s drilling and completions customers were not in Alberta, but headquartered in the southern U.S., which is also where the competition was located. “Our competitors were down there operating on the ground, which gave them an advantage,” Rakievich says. “If we were going to be a serious player we needed to have a presence in the Gulf [Coast].”
Rakievich says McCoy had two main competitors: a company in Texas and a company in Louisiana. “If we could acquire one of those companies, we’d become market leaders and have a footprint in the U.S.,” Rakievich says. In 2007, McCoy did just that, purchasing Louisiana, Lafayette-based Superior Manufacturing and Hydraulics. At the time, Superior was doing $28 million in sales and Rakievich says the two companies only competed in about 30 per cent of their products. “It was a good fit and made more sense,” he says.
Re-branding the two companies under the McCoy umbrella was the biggest challenge. It was one thing to gain Superior’s market share, but keeping it would be more work. “Who the hell is McCoy in Louisiana? It was a challenge not to lose business and have customers understand the switch,” Rakievich says. “We did it methodically and communicated with our customers. We trained the sales people and everyone on the communications strategy and that has to be well thought out.” Superior’s management team also remained with McCoy to help with the transition. “They’re still there and it’s tremendous,” Rakievich says.
“It’s exceeded my expectations,” Rakievich says. “We always said if we were going to do it, if we achieve one thing, it would be to take out a competitor, get a footprint and maintain revenue – that was the minimum. We brought more capital and we’ve grown the global business.”
In 2006, 84 per cent of the company’s revenue was created in Canada. By 2010 it was 47 per cent. McCoy maintains its corporate headquarters in Edmonton, but the company has added a sales office and warehouse in Houston to complement the manufacturing facility and office in Louisiana. As well as adding to the company’s oilfield manufacturing business, McCoy sold off some of its other business lines.
The majority of its business is now focused on manufacturing drilling and completions equipment. “We’ve really been transformed,” Rakievich says. “Getting into the U.S. allowed us to build that part of the business. It confirmed that the transformation made sense and got us committed.”
BOS Solutions built its business primarily on a system that manages drilling fluids and waste created during the process. “The core thing is we dispose of the need for a waste pit on site,” says Glenn Leroux, president and CEO of BOS. While the number of drilling pits across Western Canada has been reduced, in the U.S. those pits still frequently dot the landscape. “We could see growth limitations in Canada and the management team decided that it was time to get a foothold in the U.S. and become a North American company,” Leroux says.
BOS started looking at states where the oil and gas industry was flourishing and where the residents had a fairly strong environmental consciousness. The Calgary-based company picked Colorado. “It’s a wise and logical step,” Leroux says. “It costs about $10,000 to truck our system down to Colorado, but it would cost hundreds of thousands to get it to other places in the world.”
Once BOS decided on Colorado, the management team went down and started surveying drilling sites. “They just started driving around,” Leroux says, who joined the company in 2008. “They took a couple of systems and put them on a truck. It was a bit of a gamble.” The company did find work on a drill site and started shopping for office space shortly after, opening a small facility in Grand Junction, Colorado in 2007. “We weren’t just flying through and needed to establish ourselves permanently,” Leroux says.
The biggest obstacle facing BOS was finding people, a challenge Leroux says still persists. “Which is bizarre in a country with nine per cent unemployment,” he says. BOS established a training center and one of the company’s four executives spends time with each group of trainees in an effort to help establish the company culture and maintain it as the firm grows its American business. The U.S. has become such an important market for BOS that Leroux figures 15 to 20 per cent of his time in 2011 was spent stateside. “Quite honestly, I probably should spend more time down here,” Leroux says. “Our COO spends twice as much time as I do in the U.S.”
“Has it paid off? Absolutely,” Leroux says. During its first year in the U.S., BOS peaked at 17 jobs and the timing of the move was also significant. “Things were collapsing [in Canada] and we just moved the equipment south,” Leroux says. “It was a lot to handle, but we managed to do it.” BOS has since found work in 10 states and regional offices have been established in Pennsylvania, North Dakota and Texas.
After four years, the majority of the company’s revenue is now derived from the U.S. Leroux says about six months ago that would have meant a 60-40 split, but with the resurgence of horizontal drilling in Western Canada that margin has been somewhat reduced. BOS’s success in the Centennial State also caught the attention of a private equity firm, which purchased BOS in October 2010. “That gave us capital we did not have access to before,” Leroux says. He says the company hasn’t stopped expanding. “We’ll grow like hell,” he says. “We grew our U.S. business during the downturn. There are more influences on our growth than just rig counts.”
Launching a company can be a challenge at the best of times, but as the price of oil dropped below US$40 per barrel at the tail-end of 2008, getting into the drilling business must have seemed like an especially tall order. The founders of CanElson Drilling Inc. were undeterred. “The market was pretty weak in late-2008 and all of 2009,” says Randy Hawkings, president and CEO of CanElson. “Having said that, good rigs with good crews still work.”
The Calgary-based drilling company deployed its first rig in December 2008 in Alberta and a second rig followed a month later. The fledgling company started looking at expanding into the U.S. early. It was out of necessity – an effort to offset the impact weather often has on drilling in Western Canada and on a drilling company’s bottom line. “We were actually looking at North Dakota because of its proximity to southeast Saskatchewan,” Hawkings says. “The Bakken is a big opportunity because it is similar to the Western Canadian Sedimentary Basin. In Texas the big attraction is year-round work. They don’t have break-up like we have here.”
CanElson was looking at establishing a U.S. presence in other resource plays as well, but in the end Texas won out. The drilling company deployed its first American rig in the Permian basin in December 2009.
Business can often be about whom you know, not what you know, but CanElson’s expansion into Texas was a little bit of both. “I expanded into the U.S. with a private corporation [Western Lakota] in 2006 and for the first eight months of 2008, I worked for a Texas oil company as a drilling engineer,” Hawkings says.
He left that company and was one of four people to invest the seed money to start CanElson. His previous employer asked Hawkings if CanElson was interested in bringing some rigs down to Texas. Since Hawkings was familiar with the company and the Permian basin, it was an easy expansion to make. In fact, the expansion was simple enough that CanElson added a second drilling rig in Texas one month later, while adding two more in Alberta, for a total of four rigs in the company’s home province.
“West Texas provides us with the opportunity to work year round and smooth out the peaks and valleys of our cash flows,” Hawkings says. A year and a half after CanElson expanded outside of Alberta’s borders, the company’s rig count jumped from two to 28. It’s now operating in a number of different regions, including Texas, Alberta, Saskatchewan, Mexico and, with the $24-million acquisition of Redhawk Drilling in June, North Dakota.
The company now has four regional offices spread around North America and a range of contracts that provide much needed capital in lean and flush times alike. “In Texas we have performance-based drilling contracts where we get paid by the foot. The more you drill, the more you make,” Hawkings says. “There are some contracts like that in Canada, but it’s nowhere as prevalent.” CanElson’s strategy is to keep growing, continuing to build new rigs, as well as acquire other rig companies that are for sale – if the deal makes sense.
Now that you know what it takes to thrive in the U.S., read these tips on how to expand abroad.