Here we go again. Oil prices have plummeted and the industry is mired in another "bust."
Yes, seismic service companies feel your pain.
The geophysical business, too, is beginning to feel the pinch of shrinking budgets. Companies throughout the geophysical industry are battening down the hatches to weather another storm.
But here's a minor surprise:
Despite the low oil prices and some dire predictions for the next few years, the mood among officials in the geophysical industry is cautiously positive.
Companies reported having strategies for surviving this valley in the business cycle -- and most officials agree that the industry in general is better prepared for the latest fluctuation.
That goes not only for the larger companies in the business, but for some of the mid-sized firms, too -- several of whom discussed their situation with the EXPLORER.
"The senior executive management -- the decision makers -- in the geophysical industry today have gone through several of these down cycles, and in most cases these managers are positioning their business to be more solutions-oriented than ever before," said John Wearing, vice president of business development for Geokinetics Inc., parent company of Quantum Geophysical Inc. and Geophysical Development Corp.
"This industry is evolving from its 'contractor' image and becoming more of a partner and solutions provider to oil companies," he added. "We are more actively involved in a broader range of exploration and exploitation programs than ever before, which will help the geophysical industry weather these ups and downs."
While W.J. "Zeke Zeringue, chairman and chief executive officer of Input/Output Inc., agrees that while the experiences of the past have certainly helped companies to be better prepared for these economic cycles, he is concerned about the long-term effect.
"I've been in this industry for many years, and when you reflect back on these cyclic troughs you see that the industry has made the internal changes necessary to meet these market conditions," he said. "Coupled with the steady introduction and progression of technology, these internal changes have better prepared us for these market place situations.
"However, this particular downturn is going to be even more challenging because we have taken all these steps in the past, and it's increasingly difficult to stay ahead of the cycle," he continued.
"We've already gone through re-engineering, downsizing and outsourcing, so today there aren't very many more tools in the toolbox to go to."
Despite these challenges, Zeringue is not pessimistic about the industry.
"This business is very resilient," he said, "and we will meet the challenges through technology and smart business decisions."
Bust Cycle Mantra
Smart business seems to be the mantra of this bust cycle.
Quantum Geophysical is a newcomer that in about 16 months has built its business to $30 to 40 million in a relatively tough marketplace, its focus being with onshore, domestic, state-of-the-art 3-D seismic acquisition crews. The firm plans to strategically expand its business outside the United States as appropriate opportunities arise. Currently it is running three high-tech 3,000 channel I/0 crews.
"We have grown both internally through equipping crews with the latest technology and externally through acquisition," Wearing said. "We recently acquired Montana-based Reliable Geophysical Inc.," he said.
The firm currently has no plans to move into the marine acquisition market, where the capitalization is prohibitive and the competition fierce.
"We think as a smaller company we have somewhat of an advantage in this down cycle because we can still grow through market share," he continued. "Everybody has to grow through market share in these times and it's a little easier to do in these economic conditions if you are smaller and more nimble.
"We are also well funded through Wall Street investors, which will help us continue to expand."
Last May, Geokinetics Inc. acquired Houston-based Geophysical Development Corp., one of the largest independent seismic processing contractors, as part of the company's long-term growth strategy.
Wearing credits Geokinetics' quality management for its success.
"One key to success in today's down market is quality management and operations personnel that have a deep knowledge of the business ... This is a margin-sensitive market today, and with profit margins down it's important to have management leadership with vision in identifying opportunities to determine growth."
Today, Wearing said, geophysical companies are more than just seismic acquisition contractors; they, like others in the geophysical industry, have "moved into a partnership relationship with their customers.
"These changes have given geophysical companies more arrows in their quivers," he said, "which means more opportunities to do business in these tough times."
Finding a Niche
TGS-NOPEC Geophysical Co. has found a niche in the geophysical market that Hank Hamilton, chief executive officer, feels will help his firm hold its own in this business climate.
"Our primary business is putting together non-exclusive seismic surveys -- everything from the survey design to acquisition and processing through to marketing," he said, "(and) over the years we have built up an extensive non-exclusive data library."
TGS-NOPEC is certainly not alone in that business, but Hamilton said the firm is somewhat different because it does not own a large fleet of vessels.
"We have a few vessels, but the bulk of our surveys are conducted in partnership with other contractors who typically provide the vessels," he said. "Under these economic conditions it is an advantage to have a very low fixed cost base and low overhead."
TGS-NOPEC also keeps its costs down by contracting with other companies for processing operations.
"We have two small processing centers, one in Houston and one in the UK," he said, "but they are quite small with no more than about 25 people dedicated to doing processing in-house.
"We feel very comfortable with our small fleet of boats and small processing presence," he continued. "We can keep these assets occupied on good projects even in lean times."
Hamilton said one of TGS-NOPEC's most important assets is its knack for marketing and putting together quality non-exclusive seismic projects.
"A good deal of our work is done in partnership and various risk sharing models, but in all of our partnerships we are the exclusive marketing entity -- that is one of our strengths," he said.
Over the years TGS-NOPEC has accumulated one of the largest inventories of spec data in the Gulf of Mexico and the North Sea. The firm also has significant databases offshore Australia, West Africa, Indonesia and -- most recently -- the company has launched new projects offshore eastern Canada and eastern Russia.
And something that sets TGS-NOPEC apart from most of the geophysical industry is its focus on 2-D seismic.
"We are probably unique in the industry with this emphasis on 2-D seismic, but we feel there is still a market for 2-D surveys, particularly in frontier areas like offshore eastern Canada and off eastern Russia where clients need to get a broad overview of the region before investing in more expensive detailed 3-D data," Hamilton said.
He called 2-D projects "quite profitable for the firm, noting that 2-D sales in 1997 and 1998 hit historic highs.
The company is in an even stronger market position today as a result of a 1998 merger. Houston-based TGS Calibre Geophysical Co. and Oslo, Norway-based NOPEC International completed a merger in June that created TGS-NOPEC.
"TGS had a dominant 2-D position in the Gulf of Mexico and NOPEC had a corresponding dominant 2-D position in the North Sea," Hamilton said. "We shared a common philosophy that there are still some very good areas around the world where 2-D seismic is a very valuable tool, and where we can have a niche.
"It made a great deal of business sense to combine our efforts."
The company, he added, is competitively positioned to weather these latest conditions -- although plans for additional possible mergers have been put on hold.
"This is not a good time to tie ourselves down with long-term debt," he said. "Our best opportunity to remain profitable is to focus on our areas of expertise.
"We have a backlog of well-funded projects stretching through the third quarter of 1999. "
Oil companies and geophysical contractors aren't the only companies feeling the pinch of lower oil prices. Equipment manufacturers such as Input/Output also are positioning themselves to withstand the industry downturn.
"When the oil companies get the sniffles, second tier firms like service companies and geophysical contractors get a cold -- but third tier companies like geophysical equipment manufacturers and service providers get pneumonia," I/O's Zeringue joked.
I/O is one of the world's largest seismic data equipment manufacturers, and Zeringue said the company is positioning itself to draw on the competencies that the firm has been able to offer the industry in the past -- mainly technology that allows contractors to acquire seismic data efficiently.
"How we go about achieving that position is the challenge, of course," he said. "Our strategy to weather this economic environment decline includes protecting our core business through internalization or acquisition, focusing on customer support businesses and examining potential new markets.
Obviously, the place to start is looking at our internal costs," he continued. "What are the things that will make us money as a company? We are currently going through an intensive prioritization of the internal characteristics of the company that will allow us to balance the short and long term."
Zeringue pointed out that geophysical contractors' capital budgets are being affected by lower oil prices -- and those companies won't be going out and spending large amounts of capital on new equipment.
"Therefore, we have to look at the installed base our customers have and try to work very closely with them to get the maximum benefit out of their current capital investment," he said. "We will be focusing more on customer support services, which will benefit I/O as well as our customers in this economic valley."
The firm is looking for that middle ground between cost savings and continuing to develop technology that will differentiate the company from competitors and be a benefit to customers.
"Our challenge in this slowdown is to determine what technology will give the quickest return to the shareholders and our customers," he said. "We may get some criticism for going ahead with some technology projects, but we're right in the middle of a new product development cycle -- and in this case, the long-term benefits outweigh the short-term cost savings. Our shareholders will be rewarded in the long-term."
Zeringue is mindful that ultimately human resources are most profoundly impacted by these economic declines.
"The people are the assets that bring forth the technology, and those are the most difficult decisions to make," he said. "We've cut the fat out of this industry over the last 15 years and now we're cutting out muscle. That's very alarming."
Energy Innovations, which offers seismic survey design and quality control services as well as virtual reality type immersive environment interpretation services, has positioned itself over the years to service all the various markets of the industry, said Greg Gow, president.
"We have a presence in the domestic, international, marine and land markets, and by covering all those areas we have flattened out the economic curve somewhat," Gow said.
"This diversification within the industry allows us to overcome some of the hurdles. Additionally, as an extension of the oil companies technical support groups, we get a significant amount of outsourced work as a result of oil company downsizing."
Gow said he anticipated a slower first quarter of 1999, but in reality the company is still busy.
He said Energy Innovations has been pursuing resource-sharing agreements that will help the company weather the storm.
"Over the last couple of years we have had a resource-sharing joint venture in place with a UK competitor under which we share personnel and technology," he said -- and recently they signed a similar agreement with a competitor in the United States.
"By pooling resources we should be able to keep assets and personnel active," he said, "even in depressed economic conditions."
Jim Quintanilla, president of Rocky Mountain Permit Services Inc., offers professional permit acquisition services throughout the United States to geophysical contractors and oil and gas companies.
He said he has been able to grow his business ten-fold since its inception in 1985 as oil companies and geophysical firms have increasingly outsourced this task.
Although he foresees a 20 to 30 percent decrease in the demand for permit services in the near future, Rocky Mountain Permit Services isn't feeling any ill affects of lower oil prices so far. But, Quintanilla concedes, that is likely because his agents are the advance people.
"We are working on projects slated for February through June," he said. "We will likely see more of a slow down later in the year."
Still, Quintanilla has no dramatic plans to alter his business.
Nor does he have plans to expand his business to other industries.
"My philosophy is that we are professional permit agents for the seismic and oil and gas industries, and I feel our strengths are in understanding how those industries operate," he said. "If I expanded into an area I'm unfamiliar with I may not be able to provide an expert and professional job."
Rocky Mountain Services will be expanding its marketing efforts, however.
"You do have to work harder under these economic conditions -- you can't just sit back and hope the work comes to you," he said.
"We have to show potential clients how we can help them be more cost efficient, especially under these conditions."