Kudu Industries, Hydrotestors branch out to global markets
Canadian firms find niche exporting technical know-how
When Ray Joyce came to Calgary from the United Kingdom, he was surprised. “It was a shock to the system,” says Joyce, who crossed the pond in the 1960s from Liverpool, a city of one million, and arrived in Calgary – a city that held less than a third as many people. “I kept looking for the people. Now I want them all to leave. It’s too crowded. It’s funny how your perceptions change.”
His about-face mirrors the changing outlook for North American light oil. It’s no secret that producers, armed with new technology, are rapidly fanning out to old haunts once written off as marginal assets that had outlived their productive lives.
Joyce, now the chief financial officer of Red Deer-based Hydrotestors 2000 Ltd., aims to capitalize on the shift along with a growing international hunger for enhanced oil recovery techniques developed in North America.
“Foreigners are interested in accessing and developing our know-how, the underlying skills and capabilities we use to exploit reserves,” says Barry Munro, oil and gas leader with Ernst & Young in Calgary. “They recognize that the skills and technology that are being developed in Canada are world-class. The success that developing unconventional gas and unconventional oil resources has had in North America will be replicated around the world.”
The prediction may seem cavalier. After all, it was only last year when a blockbuster deal between PetroChina Ltd. and Encana Corp. fell apart amid disagreements over who would operate a joint venture on the Calgary firm’s Cutbank Ridge property in British Columbia. And national oil companies, for all their zeal for western assets, have only recently graduated from buying minority stakes in Canadian firms.
Lost in the deal-making of the past decade – Chinese investment in Canada jumped from $900 million in 2005 to $14.4 billion in 2010, nearly half of it in oil extraction or mining, according to PricewaterhouseCoopers LLP – is the role of the humble service company.
Despite formidable obstacles, Munro thinks there is an opportunity for Canadian completions specialists and high-tech drillers to export their know-how. Canadian companies meet “some of the most extreme and difficult operating conditions that exist within the world,” he says. “Many companies look and say that if it works in Canada, it will work around the globe.”
The path towards global markets starts with the supermajors. Take the Rosneft-ExxonMobil partnership announced in April. The two giants signed a wide-ranging joint partnership deal covering the development of assets in both North America and Russia, including plays in Western Siberia and Alberta’s Cardium formation.
“It’s a strategic agreement for both parties,” Exxon vice-president David Rosenthal told investors on an earnings call in May. He emphasized the cutting-edge fracking techniques his firm will share with Rosneft in the Cardium. “The ability for Rosneft to improve their understanding of the technology that’s out there and some of the practices that we have is important to them,” he added. “There will be a lot of learning out of that.”
For a small service outfit, the odds of scrounging a few of the lucrative crumbs created by these deals are good.
Domestic service relationships with majors could get exported when that major goes globe-trotting in the same way that a lifelong friendship with a new CEO helps the chances of a job applicant. Munro floats the example of Packers Plus, a Calgary-based fracking specialist that partners with service titan Schlumberger for business in the Middle East and Africa.
“We do follow the big boys,” says Hans Gjerdrum, vice-president of international business for Kudu Industries, a Calgary-based pressure pumper. Gjerdrum handles Kudu’s substantial international portfolio, which includes operations in Oman, Mexico, Kazakhstan and Australia and involves partnerships with companies like Occidental Petroleum, the third-biggest exploration and production player in the U.S. He’s noticed a surge in international ambitions among service companies in the last five years as firms have wised up to the benefits of diversified risk in an industry prone to the rollercoaster of boom and bust.
He sings the praises of business abroad – new markets mean more dollars, more growth, higher margins and reduced financial risk – and acknowledges that domestic partnerships can be great springboards towards those benefits. But Gjerdrum, who grew up in Norway and speaks four languages, cautions that dancing with giants can get one’s feet crushed in excruciating fashion.
“The big companies, it’s not clear always where the decisions are made,” he says. With firms that span the globe and employ thousands, the right hand might not even know the left hand exists, let alone what it’s doing. Gjerdrum, whose company already operates in Russia, thinks that the Rosneft-Exxon partnership doesn’t necessarily make Siberia’s tight oil plays more attractive to Kudu.
“You may be well respected by a company in Canada, but their operatives may not be familiar with you in, say, Colombia,” agrees Joyce of Hydrotestors. He hopes to open Hydrotestors’ first operations in South America in a matter of months, but says uncertainty surrounding the project could delay it by another year.
Hydrotestors previously attempted to break into Mexico, but the lack of an existing relationship with state-owned Pemex, which holds a monopoly on production in the country, scuppered the effort. “We tried to go into Mexico on an on-spec basis, and that burnt us quite badly when things didn’t work out quite the way they were supposed to.”
The consequences of crossed wires or an inattentive corporate partner wouldn’t be so severe if the marginal cost of international business for service companies weren’t so high. Joyce rattles off the expenses of Hydrotestors’ international gallivanting with an ease that belies obsessive familiarity. Sending a team of two to South America costs around $10,000, and that has to happen at least five or six times before any business results. Consulting with lawyers and tax specialists – seldom kept on-staff by smaller service companies – adds another $100,000.
Joyce speaks from experience. Hydrotestors stuck a toe in the Colombian waters two years ago and is still in the process of closing its first contract there. That kind of time lag can present serious problems to smaller firms, especially since return on investment is far from guaranteed. And shipping equipment thousands of kilometers also tends to demand significant coin. Hydrotestors, as its name suggests, uses water to conduct internal pressure tests of pipes.
“The testing trucks we use are big hulking great things worth half a million dollars each,” Joyce says. “To transport one of those to Colombia, the last quote I got was something like $25,000 [to] $28,000, just to get the truck there. That’s a lot of money for a small company to risk just going down and looking for business. Then you’ve got to get it through customs, so that adds to the cost as well.”
“You have to make sure you have enough financial resources behind you to return to the market a few times,” notes Monica Rovers, business development manager with Calgary Economic Development. “Things don’t happen just from going once or twice. You have to develop those relationships.”
To aid in this development, Calgary Economic Development organizes trade missions to help companies network and negotiate. This year Rovers led two missions to Colombia for service companies, setting up matchmaking meetings between Albertan companies like Sage Energy, Arcis Resources and Calfrac Well Services and major players in Colombia like Ecopetrol, Talisman and Nexen. Joyce credits the mission with boosting Hydrotestors’ chances of success in the country.
But the perils of international expansion aren’t completely obviated by a robust balance sheet and some power lunches. In Colombia, the fastest-growing oil and gas producer in the world, the government has been fighting FARC rebels since the ‘60s. Rebels once controlled nearly half the country, aided by a penchant for kidnapping those who got in their way – forced disappearances totalled 51,000 as of November 2010. And while the military has pushed FARC back over the last decade, dangers remain. FARC kidnapped 23 Talisman Energy employees in March 7, 2011, though they were released the following day.
Extra risks aren’t solely martial, either. The threat of bribery and corruption can often be higher in overseas markets, as illustrated by the $10-million fine Niko Resources paid last June to the RCMP after pleading guilty to bribing an official in Bangladesh, or even the fallout from SNC-Lavalin’s disastrous (but highly profitable) run in Libya.
Still, Gjerdrum thinks the benefits outweigh the risks. “We don’t believe in standing still in this industry,” he says. “You end up going backwards. In order to grow, we think the opportunities for Kudu are going to be outside of Canada. These are markets where the margins are good.”
He estimates that Kudu currently generates 60 per cent of its revenue domestically and the remainder overseas. Gjerdrum hopes to shift that balance to 50-50 as early as this year. “We’ve planted many seeds now around the world,” he says.
Joyce feels that all the potential hazards of overseas business justify putting a premium price on one’s services once deals materialize. Plus, more markets means less dependence on prosperity in any given one. “Alberta goes through these booms and busts all the time,” he says. “We’re going into another boom right now, but how long will it last? Who knows?”
Around the World
The Western Canadian Sedimentary Basin has been good to energy service companies in Alberta. But it’s not the only game in town. For domestic firms keen on diversifying their customer base, markets like Russia, Colombia, Australia and the United States beckon. What follows is a glimpse of five Alberta companies who are looking beyond their provincial boundaries for new business.
Source: Data compiled from 2011 annual reports and company websites