Pacific Drilling - the Preferred offshore Driller

Pacific Drilling - The Preferred Offshore Driller

Question 1:

Pacific Drilling is an offshore drilling company that provides global ultra-deepwater drilling services to the oil and natural gas industry. It provides its contract services for floating rig drilling in ultra-deepwater through its high specification drillships. The company has eight drill ships in its fleet with plans to bring their rig count to 12 in the near future. Its vessels are all state-of-the-art, high-specification drillships, designed with highly developed construction techniques.

While Pacific Drilling has seen success’ in the past, the company is currently facing a crisis due to the slump in global oil prices with an uncertain time to recovery. Pacific Drilling’s niche offering of highly specialized drillships has served it well in the past through differentiating from other industry players. However, the current environment has pushed Exploration and Production (E&P) operators to drill for cheaper oil and put deep water exploration projects on hold, thereby limiting the number of new rig contracts needed. Being specialized is not a competitive advantage anymore, the company needs to explore other arenas, both onshore and offshore, that will help diversify its offerings.

Looking into Pacific Drilling’s balance sheet, it is clear to see that the company is highly leveraged relative to its peers with a Debt/Equity (D/E) ratio of 1.18 compared to the industry average of 0.78. The same risks that apply to other leveraged firms also apply to offshore drillers. If, for any reason, a drilling rig is unable to generate sufficient cash flows to cover all of its expenses, service its debt, and still turn a profit then financial trouble will ensue. This is currently proving to be of big concern for Pacific Drilling given the oversupply of drilling rigs in recent years that has led to cold stacking of drillships and semis for the first time in history and day rate price cutting within the industry. Such uncertainty in Pacific Drilling’s future cash flows has been reflected in the company's stock price which has dropped over 63% since 2014.

Innovation has been at the heart of Pacific Drilling's growth since its inception in 2006 and has proved to be its greatest selling point to its customers and a source of competitive advantage over its peers. Leadership at Pacific Drilling chose to seek out and create its own blue-ocean through dismissing what the competition was doing (diversification) and focusing on ultra deep water drilling and providing a high quality offering to its clients. This is evident in its release of the technical and safety drilling manual that was ahead of its times and surpassed that offered by its peers. This ultimately lead to capturing the Chevron contract which served Pacific Drilling well in the years to come.