Bauer Alumni Breakfast of Champions Presents John Rynd

John Rynd, CEO and president of Hercules Offshore Incorporated, spoke to alumni and supporters at the 2011 breakfast, discussing his experience through the ups and downs of the offshore oil business and the need for employees in all capacities in the energy industry. We are an aging industry. It's been a very cyclical business where you'll go 10- and 12-year gaps where nobody enters and a whole lot of people leave. If you look around our industry, we have significant manpower shortages. When I was hired into the industry, all you needed was a strong back and a weak mind and we'll teach you the rest. But we still need a lot of those, and the professional side is very short. Your presence in Houston is needed. Those of us who grew up in the business, as I did, I spent my first 10 years working offshore around the world on drilling rigs. There's a passion about not hurting anybody; you want to go home just like you came. One of the frustrating things the industry suffered and had to put up with post-Macondo was the public's view and the administration's view that we are a bunch of cowboys who didn't care about safety, didn't have processes in place. If your safety manual is on the shelf, you missed it. It's got to be right here from the top to the bottom and the bottom up. Our EBITDA run rate in 2008 was $1 billion; in the summer of 2009, our EBITDA run rate was $100 million. So it went from one-time lever to 10-time lever in about 12 months. It's been a lot of fun since then. We're the fourth largest jackup provider globally, the largest provider of jackups in the Gulf of Mexico. We're also on our liftboats. A liftboat looks similar to a jackup but doesn't have drilling equipment; it just facilitates repair and maintenance operations offshore. It has legs, quarters, very similar, but just no drilling equipment. We own 65 liftboats, the largest provider of liftboats globally. We have two major markets: US Gulf of Mexico and West Africa, and we have two boats in the Middle East. In 2009, after the capital market crisis, the whole jackup market in the Gulf of Mexico only ran 14 jackups total, the lowest jackup count since probably the early '70s, driven by lack of access to capital. Then the business started to recover; we went from 14 to 44 as an industry. Then Macondo happened, so we've had two challenging years back to back. But things are starting to move. The Gulf of Mexico, since the creation of the drilling business, was the largest repository for jackups. We had the largest supply of any market. Starting in late '99 to early 2001, rigs started migrating out of the Gulf of Mexico as the Middle East and Asia started to consume more rigs. So we're now not the tail that wags the dog anymore. We have a total supply of 77 jackups in the Gulf of Mexico; the worldwide supply of jackups is about 425. To keep it in perspective, there are 36 that we call in the industry cold stacked. They're not fully crewed; minimal maintenance is being done, so they're not ready to go to work. Good news/bad news is we own 23 of those 36, so we're also the largest supplier of cold-stacked rigs in the Gulf. Talking about what a difference a year makes: if you go back to October of last year, we had eight of 11 rigs contracted in the Gulf of Mexico. The day forward was 44 days; our rate was $39,000 a day average; operating cost $28,000 a day, so you can see we're barely cash flow break-even operationally, and we have the 23 stacked rigs costing us $4,700 a day to stack. Go forward a year: we made an acquisition, which I'll touch on, closed in April, a domestic acquisition. We have 77 days contracted forward; average rates $50,000 a day. Outlook is positive. Our operating cost on the rig level has gone up; that's all labor. We had to give a 15% pay increase in the first quarter, but we've been able to get our stack cost down to $1,300 a day. You do that math: 23 rigs, 365 days, it's about a $25 million saving on an annualized basis. So we had that focus to get our cost down. 2009 was a tough year because of the capital market crisis, pulling the industry off the mat. We had Macondo. We laid off in probably six months, unfortunately, about half of our global workforce. We all took pay cuts, didn't match the 401K, did whatever you had to do, sublet some of our office space. All those things, unfortunately for us who have been in the business a long time, you just pulled out an old playbook and said, 'What do we got to do? We're in a down cycle.' Our motto was, 'If you're going through hell, keep going.' Really what we had to focus on was two things: we had to focus on the safety of our people and our cost. That's the only thing you can control. You can't control what the government's doing; you can't control what the capital markets are doing. So try to block that out the best you can, stay focused on what we can make a difference. The second largest contributor to the US Treasury behind the IRS is production royalties from offshore. I used to be able to pull the string and do this without any thought, but I think we generated offshore royalties and lease payments of $79 billion over a six-year period. We can go on for days about what an economic engine big oil is for Houston and the US and globally. But 79% of the production coming from the Gulf of Mexico is driven by independent companies. If you looked at part of their portfolio, ExxonMobil's global oil production: 2% came from the US Gulf of Mexico; Shell's 3%; Chevron's about 4%. All in all, we kept our cash. We started into the downturn with $90 million of cash; we're sitting today at about $130 million cash. As we all know, it's a cliché that cash is king, but when you can't sleep at night and you got $100 million of cash on your balance sheet, you feel a lot better. It gives you a lot of flexibility. We need people, and we need people not just engineers, not just strong backs and weak minds. We need all throughout the organization: accounting, finance, marketing, logistics, you name it. This industry is short of people.