If you can’t beat ’em, join ’em. By heeding that old saw and joining forces with a giant multinational competitor, Red Deer, Alta.-based Strata Energy Services is boasting a steady stream of cash at a time when other oil sector providers are trying stem the flow of lost business.
Company founder and president Ken Travis explains that Strata, which specializes in performance oil and gas drilling, has enjoyed a 2,111% revenue growth spurt over the past five years to 2008 revenue of $23.6 million. A big reason why is a three-year deal it signed to sell the rotating flow diverters it makes and uses to Houston-based energy giant Halliburton. Now, selling your bread-and-butter technology — the very thing that sets your company apart — to a competitor 750 times your size may not seem like a good move on paper, but such co-opetition deals can work for both sides.
“The sale [to Halliburton] made great dollars and sense, because it allowed us to continue to grow and it also got our name into regions where we weren’t,” says Travis, a 37-year-old oilfield lifer who started the company after resigning from his previous job when his company was taken over by a conglomerate. “As big as we want to be and as big as we feel some days, we just don’t have that true global reach, so we’re definitely leveraging off some of their global success.”
One of the reasons Halliburton approached comparatively tiny Strata Energy in the first place was that a rotating flow diverter is a niche piece of machinery, and one of the other primary suppliers is Weatherford, Halliburton’s primary competitor. Indeed, Strata, formed in 2003, is one of just a few of companies that make the equipment, which is used for under-balanced drilling, a technique that reduces the risk of blowouts and eliminates damage in the rock underneath. Strata also provides nitrogen and compression equipment, as well as other services such as drilling recovery.
Typically, Strata sells a service, sending its crews out along with its equipment to customer sites around the world. The company already has a strong business in Canada, the United States, Mexico and Australia, and has also worked in the Middle East and North Africa. But sometimes it will sell just products, as it did to Halliburton. Travis says the sale did not come with any strings attached, meaning Strata could potentially compete with Halliburton for a contract. But such an open agreement is one of the reasons it works for Strata.
“You have to look past the short-term benefits and look at the long-term consequences. If it still makes sense then it’s probably worth pursuing,” says Travis. “I could see a lot of small young companies just looking at the quick paycheque and maybe getting themselves into a deal where they find themselves locked out of competing in certain regions.”
Of course, there’s always the risk that Halliburton could turn its attention to making its own diverters, but Travis says Halliburton relies heavily on Strata for ongoing support and wouldn’t want to do anything to upset its current business. “You have to create a position where neither one of you wants to strain the relationship, and I think that’s where we’re at now,” says Travis.
The Halliburton millions have allowed Strata’s brand to penetrate the international market more quickly and put it in a strong cash position versus similar-sized competitors, which are struggling with declining oil prices and a lack of new drilling projects. Activity and margins across the oilfield service sector declined considerably in the first half of 2009 and are not expected to rebound any time soon, according to a report by UBS Investment Research. Yet Strata is enjoying its best year to date and Travis sees opportunity to grow, both organically and through acquisition.
“We’re in a strong cash position, and there’s definitely some bargains to be found,” he says. “We are currently looking at some strategic acquisitions that will allow for expansion into new regions and diversify our product and service offerings.” Any extra work and geographic coverage would also go a long way to achieving Travis’s short-term goal of becoming the third-largest player — maybe even the second-largest — in the global under-balanced and managed pressure drilling market, and possibly take the company public when the markets are better.
Although the market has taken a downturn, Strata was able to secure work in northeast British Columbia, as well as continue long-term projects in both Australia and Mexico, which has maintained its cash flow and allowed it to look at expansion in a down market. “Our reputation is starting to precede us and that, combined with some luck, means that we’re actually having to turn work down,” says Travis, attributing this to his skilled field workers. Roughly 90% of Strata’s sales involve both equipment and personnel, and the equipment has to be manned 24 hours a day by people who also work very closely with the customer’s own drilling rig and other service crews.
“Time and time again our people on location have got us repeat business,” he claims. “A lot of companies’ sales teams get you the first crack at the job, but if you don’t have the right people and equipment, you won’t get the second job.”