Tesco Corporation (NYSE: TESO) is the third largest provider of global tubular services for the oil industry and the second largest manufacturer of third party oil drills known as Top Drives. As an oilfield technologies company, Tesco Co. is responsible for designing, manufacturing and maintaining oilfield equipment used in drilling oil, gas and geothermal wells. It operates in 23 different countries providing three main business segments: Top Drive, Tubular Services, and the recently created CASING DRILLING portion. Its customers include drilling contractors, rig builders, major and independent oil and gas companies and national oil companies. The company earned $356 million in revenue but lost $5 million in net income in 2009.
Since Tesco's revenue streams are intimately tied to the energy industry, correlations such as falling oil prices or hazardous drilling installations have a negative impact on oil rig production. Also, Tesco Corp has been sued for its CASING DRILLING technology by National-Oilwell Varco (NOV) and Franks International for patent infringement. The financial crisis also has broader implications for the company, as tight credit could lead to unfavorable interest rates in the future. Coupled with lower operating margins, it will be difficult for Tesco to sustain its growth.
Not to be confused with the British retailer, TESCO Corporation was formed on December 9, 1993 as a result of a merger between Coexco Petroleum Inc., Tesco Corporation, Forewest Industries Ltd. and Shelter Oil and Gas Ltd. The company provides drilling (Top Drives) and casing services to oil companies in order to extract natural resources from the earth. Although Tesco makes most its revenue from its Top Drive segment, it is working to promote its Tubular Services division. As a result, Tesco employs many proprietary technologies including TESCO CASING DRILLING® (“CASING DRILLING”), its Casing Drive System (“CDS™” or “CDS”) and its Multiple Control Line Running System (“MCLRS™” or “MCLRS”) to create structural support for both offshore and land-based wells.
Headquartered in Houston, Texas, Tesco Co. employs around 2,000 people to provide Oilfield technologies for drilling contractors, rig builders and equipment brokers, independent oil companies, and national oil companies.
A Top Drive system (TDS) is a hydraulic or electric motor that is suspended on a drilling rig's "mast". It's used to rotate a drill string (consisting of drill pipe that transmits drilling fluid and rotational inertia) with the drill bit (the part that cuts up the rock) into a well, breaking the Earth's crust to extract oil, gas, or geothermal resources. As opposed to conventional systems like a rotary table or kelly drives, top drives travel with the drill string into the well until the operator disengages the device's pipe handler (which connects the Top Drive to the drill string). The entire process, from the time setting the drill string, adding a new stand and reconnecting to the drive usually takes less than 90 seconds to perform which reduces the drilling crew's exposure to dangerous working conditions and adds to the speed and safety of the drive. With increases in well control and hole conditioning, the Top Drive Drilling System is recognized as one of the most significant advancements in drilling technology.
Tesco manufactures a range of portable and permanently installed top drive machines capable of delivering 400 to 1,350 horsepower, with a rated lifting capacity of 250 to 650 tons.
This is Tesco's "cash cow" so-to-speak since it provides more than 60% of its revenue stream. The firm also rents these machines to oil companies on a day-rate basis and provides after-market support to add to their income.
While Top Drives are used to break into the fuel sources, Tubular Services involves laying a support structure within newly drilled wells This is called casing and essentially consists of deploying a series of pipes designed to withstand underground pressure. Although casing can be performed manually with a drilling crew, it is dangerous. As a result, Tesco developed its Casing Drive System which automates the running of tubing into the wellbore. Sold under the brand Azimuth Tubular Services™, Tesco's casing mechanism has been used to run more than 650 strings or four million feet of casing.
Although once a part of the Tubular Services segment, CASING DRILLING has recently formed into its own separate entity. Basically, Casing Drilling is the name of a proprietary technology that combines both drilling and casing in extracting natural resources. While conventional rigs usually drill using one kind of pipe and then case it with another, casing drilling combines these two steps into one. The process not only increases the safety of the process, since there is less exposure to the drill crew, but makes it possible to speed up drilling 20 to 30 percent by eliminating drill-string tripping and the problems associated with it.
Since the energy industry is subject to a high amount of variability, it is difficult to forecast net income from quarter to quarter.
Tesco, as an oilfield services company, is particularly affected by the lowering demand for oil and increased pressure from its competitors. Simply put, the oilfield services industry works under contracts made when oil prices were high and continue to bring in revenue because of them. These agreements carry heavy penalties if violated so oil companies continue to operate under them and the production makes them little revenue or profits, potentially endangering Tesco's own contracts with ENSCO International (ESV), Transocean (RIG), and ConocoPhillips (COP).
The crisis weakened the banking system due to massive losses on many subprime loans that had high interest rates, but also a lot of risk. Before 2007, ratings agencies gave the securitized form of these loans investor-grade status. Basically, they said putting money in these assets was just as good as an investment in a Fortune 500 Company. Naturally, when investors realized how dodgy these loans were, it was already too late; most people under the category of 'subprime', had defaulted on their loans and the CDO's (the subprime securities) became worthless. Without capital flowing to banks, credit is hard to come by, affecting many industries that rely on expensive machinery to operate. While Tesco's debt is small in comparison to other companies', oilfield services generally operate in a high-cost environment that makes them rely on banks for funding. A deteriorating economic climate could set very high interest rates for future loans.
There are also indirect effects. As the financial crisis spills into the real economy, more liquidity - printed and provided by the Federal Reserve and the U.S. Treasury - increases the risk of inflation. This poses a real threat to Tesco, since most of Tesco's revenue is made in the U.S., yet a considerable portion of its manufacturing is done in Canada. Therefore, if the US dollar falls against the Canadian dollar, production costs will soar, but revenues will fall.
TESCO has different competitors between its two main business segments. In manufacturing top drives, it competes with National-Oilwell Varco (NOV) and Canrig Drilling Technology Ltd, a subsidiary of Nabors Industries (NBR) . Tesco's primary competitors for Tubular Services are Weatherford International (WFT), Franks International and BJ Services Company (BJS).
National-Oilwell Varco (NOV) is the leader in oilfield services; its name can be found on the majority of oil rigs around the globe. The company pursues an aggressive acquisition strategy. Size may not be such a boon for Varco, however, since it makes the company sensitive a vast array of problems. This was evident when a decline for domestic land rigs helped to offset gains from booming demand for offshore drilling equipment.
FMC Technologies (FTI) manufactures technology for many different industries including energy, food processing, and airport technology. Since Tesco only provides services to the oil industry, it only competes partially with FMC.
Cameron Corporation (CAM) is one of the world's leading suppliers of subsea "Christmas Trees" - valves that control the flow of resources to the surface, preventing them from leaking into the environment. Unlike Tesco Co., Cameron focuses on large, expensive orders, meaning it is easily affected if a deal does not go through. This was the case when when FMC Technologies outbid Cameron for a major contract with Total S.A. (TOT)
BJ Services Company (BJS) focuses on providing casing solutions such as pressure pumping which includes cementing to support the physical structure of oil wells. Naturally, BJS competes with Tesco's tubular services portion.
Weatherford International (WFT) is another large oilfield services company. The company focuses on expensive drilling and extraction technologies, making it reliant on high energy prices.