Simmons Edeco: Enhanced Day Rate Model Key to Drilling's Future

Q: How has Simmons Edeco grown over the last 12 months into 2020?

A: The year 2019 was the first full year that Simmons Edeco was able to focus solely on Mexico, after having sold our UK offshore business. In that year, we had key objectives that included gaining new customers and retaining existing clients to build our customer base. Much of our work has been in the south of Mexico and we have been able to support our projects from our base in Villahermosa. At the end of 2019, we opened another base in Reynosa. We now have facilities in Reynosa, Poza Rica and Villahermosa the key onshore basins in Mexico.

Though we take this as a given, our No. 1 priority remains carrying out work to the highest quality. We have executed projects safely and efficiently for our customers. All of this meant that we finished 2019 and went into 2020 with 19 percent of the market share for onshore drilling in Mexico, according to our calculations. We did this with no major incident and are very proud of that. Another focus was to build relationships with communities and other industry stakeholders. This included communities where we operate. Prior to COVID-19, we were providing cleaning supplies for local children's soccer clubs and were involved in tree planting initiatives. We believe this sort of community outreach is integral, particularly in Mexico, as we know many communities feel that they do not benefit from the industry's activities that are taking place in their area.

We were also reviewing the company's business model. Everyone in the drilling sector understands the need to move on from the day rate model of leasing. Together, with producers we are trying to work out a business model that drives value for both of us.  For example, we have a partnership with International Frontier Resources and Tonalli Energía to explore this. Everyone can see that the faster we drill and the more efficient we are, the better the production and returns on capital will be. This benefits everyone. While, COVID-19 has slowed drilling activity, we are gaining more interest on this new approach and have a goal to execute on it in early 2021.

Simmons Edeco also began testing the service sector and entered into a contract with Attainment International, another Canadian-Mexican company. We understand that service provision and drilling issues are not entirely separate but rather connected and our goal is to provide an integrated service package for clients. We also continue to keep an eye out for other opportunities, including international possibilities, while focusing our interest mainly on geothermal projects. We drill holes extremely well, and with some oil and gas work reduced due to the pandemic, our interest in the geothermal market is growing. We are also trying to expand our value to clients, including offering extended payment timelines and financial incentives. We want to not only bring our expertise and equipment, but also build our financial capabilities to bring dollars to projects too. To do this, we have partnered with various entities including EDC.

Q: How could the day rate model for drilling be improved upon?

A: The day rate business model means that what is bad for the customer is good for us. If we take longer to complete our work, then we generally get paid more. This does not work well and causes a lot of friction in the relationship between client and driller. Because we currently aren’t responsible for the drilling program, it is difficult for us to take responsibility if outside influences increase drilling time. This is where we are trying to improve with clients. As a drilling company, Simmons Edeco wants to take more responsibility by being at the front end of the program’s plan and accept our share of responsibility if anything goes awry. Being engaged on the drilling plan from the start gives us ownership in the plan and we can offer our expertise to deliver an enhanced result for our clients. This requires us to take more risks in the project, but we are willing to do this if we are given increased access to the front-end plan and exposure to the production success.

This model would allow us to move onto larger well programs and provide sustained value to the client, rather than focusing on being faster on a single well. This also helps drilling companies work consistently, rather than face the up-and-down of being extremely busy in active periods and going bankrupt when a lull arrives.

Q: Why did the company choose the 738 Rig for its successful Newpek job in the Burgos Basin?

A: The Simmons Edeco 738 Rig was ideal for the project. It is a triple rig, but still very much fits the Simmons Edeco brand. This is because it is a small, tight footprint rig, which helps limit the cost and overall environmental impact of drilling. It is strong and fit for purpose. It can also handle higher pressures and larger BOP stacks – 10,000lb stacks are required in the Burgos Basin space. The job went well and as we continue to work in the basin, we believe further jobs will be completed to an even higher standard. 

Q: How has COVID-19 impacted the company’s projects and how are you addressing this?

A: COVID-19 began while we were working on the Newpek job in Burgos. We had to take precautions to make sure our staff could still travel as borders began to close and we ensured that the remaining work was carried out safely. Simmons Edeco already had emergency response procedures and HQSE processes in place, so in that regard we have not had to change much as a consequence of COVID-19. However, we obviously increased the use of measures such as temperature checks, masks and more vehicles for transport. The drop in oil price was the major factor for the industry slowdown, but following a strong 2019 where we strengthened our position in a variety of ways, Simmons Edeco entered the oil price crash in a good financial position. During this time, we continued working on the financial structure in order to offer a wider variety of financial terms to our clients, particularly in terms of payments. We understand some Mexican companies have to wait to be paid for a long time from their clients. The arrival of COVID-19 has only hastened our approach to this.

Q: What were the reasons behind choosing the MD Cowan Super Single Drilling Rig for work on the Panuco Field?

A: MD Cowan rigs can do the job for almost any conventional work in Mexico. This is ideal for us, as we work on all onshore wells except ultra-deep. This super single rig cannot pull up as much pipe as the triple, but it has a small footprint that we like. With this rig, we have been benchmarked by one of our customers as one of the Top 5 fastest drillers in the world, even going up against high-end robotic rigs. We are extremely efficient with the rig. Our efficiency cannot always make up for the frequent waiting periods that occur in Mexico due to infrastructure or weather events. Even the most recent drilling advancements in the Permian Basin, where the logistics are consolidated, cannot make up for this time. But we offer clients the ability to plan a job fully for the least downtime. The rigs we choose always offer great flexibility with lease location and BOP stacks, but the overall solution package that we provide rather than the rig itself is what we consider our best value.

Q: How will Simmons Edeco protect itself against the projected worldwide drop in drilling?

A: As a smaller provider, we have always focused on niche operations and that will continue to do so. Our goal of developing the financial end of the business to offer clients will also help. We do see that drop is here and that it will have an impact. We recognize the need to get through this tough period, and it will be as hard for us as it will be for any other company. We believe the reduced investment should create a great deal of activity in the future. The immediate need is to get through this period to win work in the future. So, while we expect a bad 2020, which could extend into 2021, afterward we hope the rig count in Mexico to significantly increase. As a Mexican-Canadian company with experience in Canada, we believe that much more drilling can be done here.  However, we recognize the threat of the pandemic and we are already exploring the service side: activity must continue even when drilling is not happening. We have not yet made this definitive investment, but we continue to survey the space and as noted consider further diversification into areas like the geothermal. At the moment, the market in Mexico is not big enough to sustain Simmons Edeco, but it is certainly growing.

Arguably for Mexico the reduction in the Permian is the single positive driver for gas production in the country, which is required. So, we are looking at a few gas projects. The advantage of being a private operator is that we can look at things outside of drilling, such as infrastructure. As a company, we have owned a variety of assets over our lifetime. We are opportunistic and we obtained the equipment we have from another entity that went bankrupt. This allowed us to lower capital costs and this makes a big difference in drilling, which has high capital costs. We will continue to monitor potential opportunities.

Q: What are Simmons Edeco's goals over the next 12 months?

A: Our goals are to get through the current difficult period together with our customers and suppliers. We have the work to carry us through. In addition, we are setting ourselves up for a brighter 2021 and to partner with operators. We continue to review the world market, including the Latin American region, though our commitment to Mexico remains firm. We will keep an eye out for opportunities that include obtaining further equipment at good prices.

The three locations that we now have in Mexico allow us to operate consistently in the country. We can mobilize our rigs and keep that mobilization efficient. Having a local presence in Mexico provides numerous benefits and shows we can operate in the country. We see that many service companies are shedding assets as we enter a fully-digital world, but someone needs to operate the physical machinery safely and efficiently, which is what we do.

Simmons Edeco is a Canadian owned drilling operator that focuses on onshore drilling provision for many of the world’s major operators. The company has been in Mexico since 2015. It boasts a local content provision of over 90 percent.