The new reality
In conversation with Mark Hannigan, CEO Allrig
The sun is just rising in Houston as we sit down with coffee to do an interview over Skype for the latest Allrig corporate magazine. Despite being separated by oceans and thousands of miles, it felt like we were sitting down to a personal face-to-face meeting in an Allrig office in the Netherlands, US, or one of Allrig’s many global offices. Mark Hannigan, Allrig’s CEO, settled in, ready for me to begin firing off the first of many questions about Allrig’s past, present and future. I began by asking him what Allrig’s corporate strategy is.
Hannigan explained that Allrig seeks to fill a gap in the offshore service industry between the major equipment OEMs and the small independents. “We are a one-stop shop global partner for offshore rig owners for the inspection, service, repair and maintenance of crritical equipment. Our entire business is designed around the concept of keeping the rig on day rate”.
As we all know, strategies change as time passes and demands shift. So, my next question focused precisely on that: how has Allrig’s corporate strategy developed over time? What are the main differences now, compared to let’s say two years ago?
Mark said that a high degree of inefficiency was tolerated within the industry when oil was over $100 a barrel, because despite the inefficiencies in the value chain, most businesses were still profitable. However, the current environment of a lower for longer oil price and marginal day rates for drilling rigs has resulted in rig owners being much more open to alternative ways of maintaining asset integrity. “That change in environment is actually very favorable for Allrig, because we are - by nature - a disruptor in the market, we challenge the status quo. When everyone’s profits are really under pressure, and they are open to doing something different, then Allrig is there to provide an innovate alternative. The downturn has had a positive impact for companies like us, because it’s brought down some barriers to for disruptive players like ourselves”.
Integrating multiple companies doesn’t happen overnight, so I ask Mark about how Allrig achieved it.
He confirms that in terms of integration, it’s actually very difficult to integrate several very businesses with different business cultures from different regions into a single identity. However, along with the investors Clyde Bowers, Hannigan and his team have developed a proprietary toolkit for successful integration of different businesses.
“In terms of globalizing all of the capabilities of each heritagebusiness, that’s been a combination of structured cross-training, relocating subject matter experts (SMEs) around the world, leveraging our in-house training academy, and utilizing digital technologies like video conferencing and smart glasses to spread the expertise”.
“Regarding the rebranding of Allrig, we were able to get there by looking at other industries and realizing that branding as a concept is not very well understood in the industry. So, we saw a real opportunity to use the rebranding process to deeply define exactly what our value proposition is, what our identity is, and put a lot of work into the front end, interviewing customers and employees, looking at what the market wants. That allowed us to truly capture the DNA of the business and thus ensured that the new brand identity was authentic and well received by the market”.
“Finally, in terms of opening up new markets, that’s really a result of listening to our clients. Our clients told us that the market was down but that they were still really busy in NOC driven markets like India, Saudi Arabia and Mexico where the service supply chain was really immature. They wanted us to take what we’d done in Europe and North America and establish similar local capabilities in those regions as fast as possible”.
Now it’s time to talk about the present and hear more about what Allrig is doing now, so I asked Mr Hannigan where is Allrig today?
He enthusiastically replied noting that despite the challenging trading environment of the last 2 years, Allrig is now emerging from the downturn a stronger business than the one that went into the downcycle 3 years ago. “During the downcycle phase, we completed the integration of all of our heritage businesses and their services, we globalized those capabilities, and rebranded the group in a way that makes sense for the industry. These changes have helped clients to understand our value proposition better”. He goes on to explain Allrig’s expansion. “We built on our existing operational hubs in mature markets like GOM and North Sea, and have established and expanded our capabilities in high-growth regions of the world which we feel are underserved by service companies, such as in Saudi Arabia, India and Mexico. We feel that we are exceptionally well positioned for the market recovery, which is now in its early phase”.
Moving on, I wanted to get down to the nitty gritty of Allrig, so I asked about Allrig’s core capabilities, and what the added value of them are to customers?
Mark didn’t hesitate to answer saying that what makes Allrig unique is a few things. “Firstly, it’s Allrig’s global footprint. We have gone to great pains to ensure that everywhere that an international offshore drilling contractor is likely to place a rig, there is a local Allrig operation in that region. Secondly, our ability to both inspect and repair equipment during the same rig visit to required standards. That can save time and money, and it increases our accountability in the eyes of the client. Thirdly, our ability to bundle our 6 key services on one PO with one technician team sets us apart. Those services being jacking systems, cranes, drilling equipment, derricks, rope access/NDT, and pipe & BOP handling equipment”.
“We are able to both the inspection and remediation, but we’re also able to bundle those services into one-stop shop, one PO, one group of technicians, and one mobilization, anywhere in the world. That’s what differentiates Allrig from others. Traditionally a drilling contractor would have to use 2-3 inspection companies and 4-5 repair companies to look after all that equipment across their fleet. Allrig can do it with one PO anywhere in the world”.
Now let’s look ahead and talk about the future. What do you see, Mark, as the biggest challenges in the near future?
Mark points out that one of the biggest challenges right now is the fact that rig owners don’t want to spend money reactivating stacked rigs until they are sure they have secured a new contract for each rig. This is because the guaranteed future revenue from the new contract is required to fund the reactivation. “The challenge is that the client, without spending too much money, needs to be ready to catch up on years of deferred maintenance so they can get the rig back to work on time and cost effectively. Helping clients solve that puzzle is a big part of what were doing right now”. With that in mind, I wonder what the opportunities are and pose the question to Mark, not yet tired of being questioned so early in the morning in Houston. He says the theme that’s dominating Allrig’s strategic thinking is digitization and using technology to deliver cost-efficient solutions. “At the start of the downturn offshore drilling was uneconomical under $60 per barrel. Over the last couple of years, what we’ ve sought to do as an industry is make offshore drilling viable at $50 or less, largely by cutting costs, cutting margins and having fewer people do more work. This has gotten us pretty far and many projects secured final investment decisions (FID) on the back of these improved breakeven numbers, but a lot of those savings are unsustainable in the long-term”.
“Now we need to use technology and innovation to offset any cost rebound and get to that next level of cost savings. Digital technology is going to be the dominant story for the industry for next 5-10 years and Allrig sees a huge opportunity here”.
Technology is changing so quickly, it’s hard to keep up! I ask Mark how Allrig is keeping up and the relevant of technological innovations to Allrig. What is Allrig planning to do to integrate them in their services?
There is a glow in Mark’s eyes with this question. He is energized and responds: “What we are experiencing right now is the merging of two very different worlds that historically have not really played together very well. The first is the 150-year-old oil and gas industry, which is very conservative, traditional, and mechanical in nature. The other is the very young 20-30 year-old digital technology industry, which is comfortable with data you can’t see, groundbreaking technology that hasn’t necessarily been tested, and lots of experimentation. These two worlds are in the process of being fused together. We’re right in the middle of the digital revolution in the oil industry. The oilrig of the future, just like the home of the future, will be completely data driven and this has ramifications for every aspect of the industry. Allrig is in the business of ensuring asset integrity, making sure that multi million or billon dollar vessels belongin to our clients work to the best of their ability at all times. At the moment traditionally, asset integrity, or making sure the rig is in tip top shape, requires a lot of highly skilled people travelling to and from the rig, inspecting and fixing things. In the future, a lot of that work will be done remotely and the trigger for intervention will be diagnostic data flowing from the piece of equipment itself. It’s quite a radical shift. For an industry that is not really data friendly per se, this is a very daunting transition, but at Allrig because we’re disruptive, we are early adopters and leading the charge here”.
“We’re very active in the use of ROVs (mini submarines) for underwater work, UAVs (drones) for work at height, augmented reality (smart glasses) for remote inspection, and condition-based monitoring to drive predictive analytics. These are all proven digital technologies used routinely in other industries and Allrig is leading the charge in the oil and gas industry. My feeling is that companies that fail to react to this digital revolution will not feature in the industry of the future”.
Curiosity struck again and I began to wonder if all of this great technology would fly out of the window with barrel prices over $100 again. According to Mark, not necessarily.
“The energy transition means that the renewables are here to stay and that fossil fuel based energy must now embrace digital technology to remain competitive., This process is now unstoppable and progress will continue despite future slower market periods. Variations in the oil price will speed up and slow down this progress, but it won’t stop, it’s inevitable”.
Is it difficult to convince clients to spend money on avoiding/preventing problems down the line, as in the American saying: If it isn’t broken, don’t fix it?
“This industry is very reactive by nature. The notion of spending a little money now on monitoring equipment and analytics, to save money later is still unpalatable. However, the ‘great crew change’ that we are undergoing which is a massive demographic shift in the industry from baby boomers to GenXers and millennials, is helping. The younger generations are more comforytable with data driven solutions and the concept of a little upfront investment and to achieve major savings down the line”.
I move on to a more pointed question: why should drilling contractors work with Allrig?
Mark responds right away explaining that Allrig understands what drives shareholder value for drilling contractors is revenue efficiency and keeping rigs on day rate. “We designed our entire business around keeping rig owners on day rate. We also understand the service world and we can deliver genuine bottom-line efficiency and cost savings to rig owners across their fleet in a way nobody else can”.
Mark goes on, speaking about strategic partnership and the important of them to Allrig. He remarks that Allrig is very collaborative by nature. “We have a lot of exceptional business partners across the world; supply chain partners, and shipyard partnerships around the world, as well as technology and OEM partnerships. Some of the world’s leading OEMs have realized that the competences to be a great OEM are not necessarily the same ones that it takes to be a great service company. For some OEMs it’s a smarter move to have a service partner like Allrig taking care of aftersales, and allowing the OEM to focus on optimizing product design and manufacture. The consolidation going on in the industry right now is very healthy. At all levels on the value chain companies need to focus on their core competences and work with strategic partners to remove waste and maximize efficiency and value for money”.
So, what is the significance of a partnership with a shipyard in, for instance, Johor Port in Malaysia? How does it respond to the needs of the industry?
Showing no signs of tiredness from all of the questions, Mark jumps to answer the question from the position of a rig owner. He says “If you’re a rig owner and you can’t have certain repairs completed on location, you really don’t want to bring the rig into a large, busy shipyard. What you really want is to get the rig quayside and get back on location as fast as you can. Shipyards generally are not known for expedient repair of drilling rigs, because frankly they make more money the longer the rig is there. So what we try to do is provide a faster quayside repair service alternative for rig owners. By working with our quayside and port partners we can scale up to 300-400 people when rig is berthered, compelte the scopes and scale down quickly to get our client back on day rate”.
I was aware that Allrig had engaged in a partnership with the major OEM, Lee C. Moore (LCM), so I asked Mark about how the partnership adds value to Allrig, and how it benefits LCM as well.
Mark seemed proud to tell me about it. He explained “Allrig’s partnership with Lee C. Moore is a great example of how collaboration can add value for our clients. Lee C. Moore is a world-leading drilling structures technology company based out of Tulsa, Oklahoma with drilling structures installed all over the world. There was a time when it was acceptable to service those structures by flying experts from the USA all over the world to complete repairs and the costs and time it took were accepted as the norm, but as the industry strives for dramatic time and cost efficiency improvements, this service model is no longer viable”.
“So, LCM was faced with a choice of establishing localized service capabilities in key regions or partnering with a leading service company with whom they could entrust their brand reputation, and who could represent them and provide a more rapid service response to the customers who had bought their drilling structures in the first place. We’ve piloted this model in the Middle East and it’s now growing into India and Asia Pacific. Allrig and LCM, as well as our clients, are very much seeing it as win-win. LCM is able to maintain more of their market share of servicing the equipment they made, Allrig is able to act with the credentials of the OEM backing us up, and the rig owner gets a much faster service from the OEM. It’s ideal and a great example of an OEM focusing on its core competence, Allrig focusing on its core competence, with no conflict between the two and complimentary company cultures. In the end, we are delivering more value to the customer”.
So, why does Allrig talk about being an alternative to an OEM, but partner with one? Is this a switch in strategy or about something else?
“Allrig is moving from being the alternative to OEM to being the service partner of OEM. OEMs continue to do what they’re specialized in, the design, manufacturing and testing of equipment, and we at Allrig continue doing what we’re very good at, which is installing, inspecting, repairing and upgrading that equipment. We’re happy because what the customer wants is an OEM that can provide world class aftersales support. This is actually the dream scenario for the customer. Our OEM partnerships are a realization and validation of the two different skill sets. It goes two ways; we validate each other”.
Speaking about OEMs, I asked Mark for another example where a partnership with an OEM was beneficial.
He then told me about the successful partnership with Baker Marine Ingleside. “Baker Marine Ingleside has a long history of designing and manufacturing drilling rigs, but the business has no service capabilities anymore but is still the owner of the technology. So, Allrig is a ready-made service partner and this is our longest OEM partnership at more than 10 years. When a rig owner calls Baker Marine for service support, Baker Marine will call us and instruct Allrig to manufacture the spare parts and install them. The customer gets OEM-backed service quickly from a local team, Allrig gets operational value, and Baker Marine gets royalties from their intellectual property, which still generates value for their investors”.
Almost 2 hours later, we finished our engaging transatlantic Skype conversation. Meanwhile the sun had fully risen in Houston, and the sun was beginning to sit low in the cloudy Dutch sky. As I signed off my computer to call it a day, Mark was just beginning his long workday at Allrig in sunny Texas.