Oro Negro Buys Drilling Company as First Acquisition

Q: How has Oro Negro evolved from an investing outfit to an established operating company over the past year?

A: We have been primarily building up our management team with the best and most talented people specializing in different fields, and have been executing our business plan to become an integrated and diverse oil and gas company through acquisitions. We began this process by acquiring TODCO (The Offshore Drilling Company), a wholly owned subsidiary of Hercules Offshore, a company based in Houston, Texas. TODCO, at the time of the acquisition, had one platform rig under contract with Pemex. Subsequently, we acquired two premium jack-ups under construction at Keppel FELS Shipyard from a company called Jasper Investments. The first rig was delivered in November and the second one will be delivered in May, 2013. Thereafter, we acquired two additional premium jack-ups from PPL Shipyard, with delivery dates scheduled for December 2013 and March 2014.

Q: For what specific reasons did you acquire TODCO?

A: We bought the company for a variety of reasons, the first being its outstanding management team and its record for operating the rig with the best utilization rate in Mexico. We were able to retain 100% of the personnel upon the acquisition, thus absorbing a cohesive operational setup with an excellent track record and great scalability. The second strategic reason behind the TODCO acquisition is the prequalification status with Pemex that Oro Negro achieved as a result of the acquisition, enabling the company to market and operate drilling assets to Pemex going forward.

Q: What do you see as the main challenges in introducing state-of-the-art ultra-deepwater units such as drillships in the Mexican market?

A: The key challenge, in my opinion, is the timing of the decision from Pemex to contract the asset(s) in the marketplace. It is inevitable that the Mexican deepwater reservoirs, which today account for over 40% of 2P reserves, will be developed in the future; however, the prioritization of the investment budget will determine the pace of development given the significant higher costs when compared to shallow waters and onshore reservoirs. With respect to the contract assignment process, I would expect Pemex to look for the highest standards of safety and efficiency in selecting the asset and having a proven operator. The timeframe in which Pemex will award such contracts depends on the format that Pemex utilizes tender process or direct assignment. We are convinced about the long- term demand for the asset class and, in the same spirit that drove the acquisition of our jack-up fleet, we are prepared to invest in securing availability for Pemex of state-of-the-art ultra-deepwater units. The characteristics of our deepwater reservoirs demand assets that can operate at significant water depths and being in a hurricane-prone environment, the mobility of drillships will, in our view, make them the preferred asset class for exploration and development.

Q: What are Oro Negro’s ambitions for the future in terms of deepwater drilling and offshore logistics services for deepwater?

A: We have been analyzing investments in assets that are tailored to Mexican requirements and that have certain differentiating aspects that could prove critical in accelerating the development of Mexico’s deepwater potential. In addition, we are in advanced conversations with an established operator to jointly pursue the offshore logistics requirements for deepwater exploration and development. The combined asset base and expertise will allow us to offer our client an integrated solution that minimizes development time and increases the net present value of the reservoir. Our approach to offshore logistics is no different than our approach to drilling in the sense that we see opportunities in both shallow water as well as deepwater solutions. There is a significant potential in the development of our shallow water new discoveries that will require multipurpose construction and supply vessels, among others.

Q: In addition to shallow water drilling with TODCO, deepwater drilling with a partner to be defined, and shallow water and deepwater logistics, are there other areas you would like to add to this portfolio of priorities?

A: Yes, we participated in one of the rounds for the incentive- based contracts, in particular an offshore field. It is certainly one of the areas that interest us and to that end we are engaging in discussions with a company that has proprietary technology and processes for enhanced recovery to form a joint venture to pursue opportunities in the Mexican market. In addition to the attractiveness of the business model inherent in incentive based contracts for mature and marginal fields, we see potential for vertical integration.

Q: What are the main differences between Oro Negro and established drilling companies such as Grupo R?

A: Grupo R is a well-established company that has been in the business for a long time. They have been very successful and are a very well-run company, so I think there are a lot of things that we could and should emulate from their operations. They understand Pemex and have the capacity of investing in the assets that Pemex requires to meet its production objectives. I would say that Oro Negro is different in the sense that it is a much younger company; that it has developed its expertise through acquisitions rather than through an organic approach; and that it is structured as an institutional platform rather than as a family-run business.

Q: How does the relationship between Oro Negro and Navix function?

A: We are very fortunate that we have fantastic management teams in both companies. In the case of Navix, my involvement is less on day-to-day operations and more on a strategic function. We created an Executive Committee – which I preside over – that is tasked with managing the relationship with our funding sources, charting the growth of the company, and overseeing the management. In addition, I continue to participate in the board of directors and the key operating committees, including, among others, the credit committee. In Oro Negro we are in constant flux as the company evolves from an investing outfit to an established operating company. The most important aspect of my role is to incorporate the management skill-set that is consistent with the quality of the assets that we acquire. The TODCO acquisition has made this transition easier and we continue to add talent with operating track record on par with the acquisition of assets.

Q: How do you avoid conflicts of interest between Oro Negro and other companies financed by Navix that are also competing for contracts with Pemex?

A: Even though there might be some overlap that could potentially create a conflict, the universe of service companies that we finance in Navix is very vast and Oro Negro only focuses on very select areas of a much higher profile, so it would be very rare to see a potential competitor of Oro Negro being financed by Navix. Secondly, we manage these companies independently, so it helps that people are very clear with respects to their fiduciary duties to make sure that not even the appearance of conflict is present.

Q: What are the possible changes that the new federal government may bring to the energy sector?

A: We do not do political speculation, but what we do see is an investment trend in Pemex that is really inelastic due to its high correlation with the fiscal health of the country. It is a very exciting time in the industry because there are a lot of prospective resources, not only in terms of deepwater, shallow water, and conventional resources, but we also have unconventional resources such as liquid gas, shale gas, and shale oil. We are pleasantly surprised with the new administration and their campaign promises, being very vocal about the importance of the energy sector and trying to find mechanisms to attract more investment, but I cannot predict what specific policies will come out of it.