Friday, May 27, 2011

Oilman keeps going back to the well

From its humble roots in a tin shack in Edmonton, Fred Pheasey spent 25 years of his life building Dreco Energy Services into one of the world’s top three suppliers of oil drilling and well-servicing equipment. But this success story did not come without its trials and tribulations. It’s a riches to rags to riches story.

At one point in the 1980s, with the drilling industry in a crisis, Pheasey had to dig deep to keep the company he founded in 1972 afloat while it went through receivership.

Dreco was acquired by U.S.-based National Oilwell Inc. in 1997, but, at 60, the son of an Edmonton butcher continues to flame his passion for the drilling industry as an executive vice-president in the new company’s Edmonton office.

Pheasey’s distinction as one of Canada’s most seasoned and savviest oilmen recently earned him induction into the Canadian Petroleum Hall of Fame. 1. What sparked your interest in drilling and well-service equipment?

“One of my schoolteachers (Madeline Johnson) also was a customer at my father’s butcher shop (Acme Meat Market) in Edmonton, and I used to deliver meat to her home for the butcher shop on Saturday mornings on my bicycle. I was in Grade 7 then. That’s where I met my schoolteacher’s husband, John Johnson, who was an engineer. He ran the Edmonton operation of Barber Machinery, which repaired oilfield equipment. He was a very bright guy. I’d talk to him on my stop for milk and cookies. He pointed out to me that I’d have to go away to school to take architecture, which is what I was looking at going into. He said I could start out by taking two years of engineering and then move elsewhere to take architecture. But after two years, in which I spent a lot of time talking to Mr. Johnson, I decided to continue with engineering and later ended up working for Barber Machinery for seven years.”

2. What did your father teach you about business when you worked at his butcher shop as a youngster?

“Stick-to-it-iveness. And he taught me that if you look after your customers, your business will take care of itself. It was a good experience. My father (Fred Pheasey Sr.) worked hard, he was close to his customers and he provided quality.”

3. What motivated you to start Dreco Energy Services in 1972?

“There were never really drilling rigs manufactured in Canada then. They were generally imported, in pieces and components, from American sources. I just felt that there would become an opportunity to sell rigging equipment in Alberta, because the requirements for drilling were so different in Alberta from the U.S. because of our extremely harsh winters.”

4. What was your major obstacle in getting the company off the ground?

“Credibility. But I was very fortunate that I had customers who I had dealt with while at Barber Machinery who I got to know very well, and who liked the fact that I could get things done.”

5. What business principle had the most to do with your success with Dreco Energy Services?

“I think it was the fundamental one. That’s where you ascertain what the real thing is that your customer needs when he’s going to buy a drilling facility. You present it to the customer, you make a deal with the customer on what it would do, what it would cost, and when you would do it. And then you do everything you said you were going to do. Now, it doesn’t get any more basic than that, does it? You also have to have something clever in your design that separates you from everyone else.”

6. What do you remember about the company’s rapid growth in the early years?

“We had phenomenal growth right from the start. From 1972 to 1981, we had a compounded annual revenue growth rate of 100 per cent per year and earnings growth of 130 per cent per year. At the end of 1981, we had 3,000 employees, revenue of about $1 million US per day and a backlog of $250 million. Six months later, we were in receivership.”

7. How did that happen?

“The wheels came off of everything in Alberta in 1982. The drilling industry went from a very prolific business to right over the cliff. Our customers couldn’t pay us. It was general havoc in the industry. We were on such a growth bent at the time that there was no way we could shut it off in time. But we stuck with it, worked things through, and paid out the bank. The suppliers who were left hanging had to become stockholders. We finally got out of receivership and Chapter 11 in 1985. We rebuilt the company and then, as soon as we got going, we had 1986, a terrible year for the oil markets. We finally saw a light at the end of the tunnel in the late 1980s and were able to grow again.”

8. How did the experience of the company in receivership affect you personally?

“Well, you certainly come out of it as a better person. But I don’t know if it’s a character builder everyone should go through. When I look back at it, I feel badly for all the people it affected. But the way we looked at it was that anybody could quit. And we weren’t going to quit. When you’re a go-go company growing like hell, if you get a little careless as far as pay scale and looking after costs, going through a financial crisis sure turns those things up. And if you’re smart, you don’t let that laxness come back into the company.”

9. How did you feel when National Oilwell made its pitch to buy out Dreco?

“At the time, we were wondering how we were going to look as a company going forward. The oil industry and those that serve the industry had been getting smaller for many years. And, for us at that time, the question was whether we were going to be the consolidator or be consolidated. The expertise in management was that of starting things up and building things. We didn’t understand the acquisition business. When we looked at the offer from National, we found that one plus one was going to equal more than two. We could see benefits for our employees, for shareholders and our customers, and it has worked out that way.”

10. What does your current role as vice-president of National Oilwell entail?

“I enjoy our customers, I spend about half (the work day) at my business, I’m a director of National Oilwell, and I’ve got enough grey hair and I’ve seen enough mistakes where I can help some of the younger people out so they don’t have to make the same mistakes I’ve made.”

11. What’s your outlook for the drilling industry?

“Overall, I think the industry has lots of challenges, lots of opportunities and lots of solutions to drill in tougher environments. I think more opportunities for drilling equipment will be offshore rather than onshore (drilling). There will be drilling in deeper waters offshore. In Alberta, oil drilling is going to be less important than tar sands development for supply. I think natural gas drilling is absolutely going to go gangbusters in Alberta and British Columbia. Gas is such a clean- burning fuel. The drilling community in Alberta is very efficient at drilling it, and we have good companies with good land positions. The price of gas will keep attracting investment.”

12. Are you concerned about how the restructuring of companies into royalty trusts may affect the drilling industry?

“I don’t think the royalty trusts are bad for the drilling industry. I think they play a very important part in the industry. There’s still a portion of those profits being reinvested in the industry. At the same time, that also leaves more room for opportunity for those companies who are hell-bent for growth to pick up the slack. You essentially have two groups operating, a growth group and an income group. And in a mature industry, that’s not too bad, is it?”

13. Does it rankle you that there is so much confusion over the potential effects of the Kyoto Protocol?

“Yes, it’s very confusing. As an Albertan, the thing I’m concerned about is the uncertainty that Kyoto carries with it. And with uncertainty and not understanding the ramifications of it, that impacts investments. It particularly affects long-term development like the tar sands. That really bothers me. The difficulty is in how to interpret the long-term effects. I don’t think anybody knows. I’ve read some of the treatises by investment bankers on the change in internal rate of return for tar sands development with Kyoto as being immaterial. According to who? According to he who is promoting investments?”

14. What’s the proudest achievement of your career?

“In 1998, the Canadian Association of Drilling Contractors made me an honorary member. And to be made an honorary member of an organization that is comprised of your customers tells you that you must have done something right for them. That’s probably as good as it gets.”

15. What’s your greatest regret?

“I didn’t spend enough time with my family. I’ve told my boys (university students Earl and Paul): ‘I hope you have phenomenal careers.’ I’ve told them that I hope they have fun doing whatever they intend to do. But I hope they have a little less fun than I had. They’d be better off for it and they’d be a little more well-rounded than I am. I spent a lot of time away from those boys chasing dreams in the oilfield. And I had a ball doing it, I gotta tell ya.”

16. What’s the best advice you can offer young people?

“Pick something you like to do and pick something you can be (passionate) about.”

17. How important is money to you?

“It’s like the fact that I can play golf every day. I love the game of golf. But it’s much more important to be able to play golf every day than it is to actually do it. I don’t live high on the hog. I live in the same house I’ve lived in for the past 25 years. I like to go to California in the winter, but I’m an Edmontonian and I’ll always stay an Edmontonian.”

18. What’s your view of the scandals scathing the financial markets?

“I’m disappointed with the lapses in integrity. I find that very distressing. I’ve always respected – or at least I hope I have – the corporate governance obligations. A lot of things I took for granted, I don’t take for granted today. I missed some of those investments (bankrupt companies such as Enron and WorldCom), and the only reason was that I didn’t understand them. I’m a stock-holder of Campbell’s soup, and I know why. I’m a stockholder of Exxon, and I know why. I’m a stock holder of Microsoft, and I know why. When I used to sign financial reports at Dreco, I used to think just how important it was to our directors and management to make sure we didn’t err, that we didn’t overstate, that we didn’t understate. And then when you see the crap that is happening today, it just makes you sick.”

19. Would you ever retire?

“No, the oil well service business is a marvellous business, and besides a business, it’s a good hobby, too.”

20. What is your primary goal beyond business?

“I just want to see my boys develop and become contributors. You know, I had to start with zero (finances). But they don’t.”

IN PROFILE: Fred Pheasey
* Born/raised/age: Edmonton; 60.
* Title: Executive vice-president, director, National Oilwell Inc.
* Education: University of Alberta, Bachelor of Science (mechanical engineering).
* Family: Sons Earl, Paul.
* Career: Pheasey founded Edmonton-based Dreco Energy Services in 1972 and ran the company until it was acquired in 1997 by Houston-based giant National Oilwell, which retained him as an executive. Prior to Dreco, Pheasey spent seven years moving up the ranks to assistant to the president with Barber Machinery, and also worked as a consultant to the drilling industry.
* Accolades: In 1998, Pheasey was named a life member of the Canadian Association of Oilwell Drilling Contractors in recognition of his technical and business achievements in advancing the Canadian drilling industry. This year, he was inducted into the Canadian Petroleum Hall of Fame.
* Passion: Golf.

THE COMPANY: National Oilwell
* Profile: National Oilwell, based in Houston, Tex., designs, manufactures and sells the major mechanical components for land and offshore drilling rigs as
well as complete land drilling and well-servicing rigs. The company operates a network of distribution services centres in Canada and the U.S. In 1997, National became an industry giant when it acquired its competitor, Edmonton-based Dreco Energy Services.
* Brass: Pete Miller Jr., president/CEO; Steven Krablin, vice-president, chief financial officer; Fred Pheasey, executive vice-president.
* Website: www.national-oilwell.com
* Edmonton Office: 3550 93rd St. (780-944-3995).
* Calgary Office: 1100, 540 5th Ave. S.W. (403-294-4500).

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