Case 11 Pacific Drilling the Preferred Offshore Driller C-14

Case 11: Pacific Drilling: the Preferred Offshore Driller C-147
CASE11 ~ IVEY I Publishing
Pacific Drilling: The Preferred Offshore Driller
From June 2014 to January 2015, the market price of oil
fell from US$1151 per barrel down to $49 per barreU
As oil pr ices went down, so did the appetite of energy
companies fo r offshore exploration. Further com-
pounding the problems was the oversupply of rigs, due
to drillers having overbuilt during the boom times. As
of March 2015, there was no near-term recovery in sight
for oil prices, which had major implications fo r Pacific
Drill ing, a growing offshore drilling compan y based in
Texas. Founded in 2006, Pacific Drilling own ed and
Exhibit 1 Pacific Drilling Income Statement s, 20 12-20 14
Revenues
Contract d rilling
Cost and expenses
Cont ract drilling
General and administrative
Depreciation
loss of hire insurance recovery

()pet'atlng income
Other income (expense)
Costs on interest rate swap termination
Interest ex pense
Total interest expense
Costs on extinguishment of debt
Ot her income (ex pense)
Income before income taxes
Income t ax expense
Net income
Earnings I common share, basic
Weighted average number of common shares, basic
Earnings I common share, diluted
Weighted average number of common shares, diluted
Source: Company documents.
operated a fleet of eight high-specification drillships
operating in ultra-deepwater drilling environments in
depths up to 3.7 kilomet res (km) and offered the m ost
advanced drilling technology available. As of 2015, the
company had nearly 1,600 employees and had generated
more than $1 billion in annual revenue (see Exhibits 1,

2,and 3).
With growing competition from rivals- both emerg-
ing and more established companies- Pacific Drilling
sought to expand its customer base. However, the dose
s 1,085,794 s 745,574 s 638,050
(459,617) (337,277) (331.495)
(57,662) (48,614) (45,386)
(199,337) (1 49,465) ( 127,698)
(716,616) (535,356) (504,579)
23,671
369, 178 210,218 157,14 2
(38,184)
(130,130) (94,027) (104,685)
(130,130) (132.211) (104,685)
(28,428)
(5,171) (1,554) 3,245
233,8 77 48,025 55,702
(45,620) !22,523) (21 ,713)
s 188,257 25,502 33,989
s 0.87 0.1 2 0.16

217,223 2 16,964 216,901
s 0.87 0.1 2 s 0.16
21 7,376 217.421 21 6,903
Haiymrg U, Fridiric }ncqutmin, and Toby U wrote tlris
casesolely to provide materinl for dnss discussion. 11Jt authors
do rrot inttrul to i/lustmte either effocti>-e or
ineffoctio-e handling of a managerial situation. Tire authors
may hm-e disguised cmain names and other iikntifying
irrformntion to prot«! amfidentia/ity.
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C-148
Exhibit 2 Pacifi c Drilling Balance Sheets, 2013-2014
Accounts receivable
Materials and supplies
Deferred financing costs, current
Deferred costs, current
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Deferred financing costs, current
Other assets
Total assets
Liabilities and shareholders' equity
Accounts payable
Accrued expenses

long-term debt, current
Accrued interest
Derivative liabilities, current
Deferred revenue, current
Total current liabilities
long-term debt. net of current maturities
Deferred revenue, current
Other long-term liabilities
Total long-term liabilities
Common shares. $0.01 par value per share, 5,000,000
shares authorized, 232,770 and 224, 100 shares issued, and
215,784 and 217,035 shares outstanding as of December 31,
2015, and December 31, 2013, respectively
Additional paid-in capital
Treasury shares, at cost
Accumulated other comprehensive loss
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity

relationships that it had cultivated with its existing part-
ners (which had helped its early stage growth) raised
concerns that the driller had become too closely linked
to them (in terms of culture, processes, and technology)
to effectively translate its efficiency gains to new pro-
ducer partners.
Part 4: case Stud ies
231,027 206,078
95,660 65,709
14,665 14,857
25, 199 48,202
17,056 13~9
551 ,401 552,858
5,431,823 4,512, 154
45,978 53,300
48,099 45,728
6,077,301 5,164,040
40,577 s 54,235
45,963 66,026
369,000 7,500

24,534 21,984
8,648 4,984
84,104 s 96,658
572.826 251 ,387
2,781 ,242 2,423,337
108.812 88,465
35,549 927
2.925,603 2,512,729
2, 175 2,170
2,369,432 2.358,858
(8,240)
(20,205) (8,557)
235,710 47,453
2,578,872 2,399,924
6,077,301 5,164,040
T he company's chief executive officer (CEO),
Christian J. Beckett, and his team received a range of
opinions about what the company should do to weather
the storm and emerge stronger. Investors also felt
the pain from the company's stock pr ice sliding from
Sll per share in 2014 to less than S4 per share, as did

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Case 11: Pacific Drilling: the Preferred Offshore Driller C-1 49
Exhibit 3 Pacific Drilling Cash Flow Statements, 2012- 2014
(m rhousonds) 2014 2013 2012
C.sh flow fTom operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense
Amortization of deferred revenue
Amortization of deferred costs
Amortization of deferred financing costs
Amortization of debt discount
Write-off of unamortized deferred financing costs

Costs on interest rate swap termination
Deferred income taxes
Share-based compensation ex pense
Changes in operating assets and liabilities:
Accounts receivable
Materials and supplies
Prepaid expenses and other assets
Accounts payable and accrued expenses
Deferred revenue
Net cash provided by operating activities
C.sh flow fTom Investing activities:
Capital expenditures
Decrease in restricted cash
Net cash used in investing activities
C.sh flow fTom tln.ndng activities:
s 188,257
199,337
(109,208)

51,173
10,416
817
18,661
10.484
(24,949)
(29,951)
(56,493)
20,865
117,001
396,410
(1,136,205)
(1,136,205)
s 25,502
149,465
(72,515)
39,479
10,106

445
27,644
38,184
(3,119)
9,315
(53,779)
(16,083)
(30,840)
12,301
94.482
230,587
(876,142)
172,184
(703,958)
s 33,989
127,698
(95,750)
70,660

13,926
(3,766)
5,318
(89,721)
(6,640)
(61,548)
33,865
156,967
184,998
(449,951)
204,784
(245,167)
Proceeds from shares issued under share-based compensation
plan
Proceeds from long-term debt
95
760,000
(41,833)
1,656,250 797,415

Payments on long-term debt
Payments for costs on interest rate swap termination
Payments for financing costs
Purchases of treasury shares
Net cash provided by financing activities
Increase (decrease) In cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Sourc~: Company docum~nts.
the stock price of all offshore drillers during that time
(see Exhibit 4). As he considered the available options,
Beckett faced another critical crossroad. The company
had survived tough times before- in the early stages of
the company's development, the team had successfully
(7,569)
(7,227)
703.466
(36,329)
204,123
s 167,794

(1.480,000)
(41,993)
(62,684)
71,573
(401,798)
605,921
204,123
(218,750)
(19,853)
558,812
498,643
107,278
s 605,921
manoeuvred through the 2008 financial crisis as th e
cred it markets collapsed. But as Beckett admitted,
the current challenge was unique in many ways, and
Pacific Drilling was a different company from earlier.
However, it remained to be answered to what extent
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C·150 Part 4: case Studies
Exhibit 4 High Correlation Between Ofuhore Drillers Stocks
and Oil Price, December 2013 to 2014
75
65
55
45
35
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- PACD - Offshore Peer Average - WTI j
- Brent - OSX Index
~--
Note: PACD = Padflc Drifting; wn • Wtit T~us ln...,rmed~ate:
OSX • Oil SeM<e Sector Index
Source: OrganiLltion of the ~t.....,m Exporting Countries;
Yahoo finance: and company analysis.
Beckett and his team could rely on what they had
successfully done in the past, and to what extent they
would need to adapt.
The Offshore Drilling Industry
The offshore oil industry involved the exploration and
production of oil and gas from underwater wells, often
in locations off continental coasts but sometimes in
inland seas and lakes. Offshore sites held greater prom-
ise than onshore sites for oil producers to develop their
oil reserves, and achieve higher production rates, espe·
cially in less explored deepwater sites. For instance, in
recent years, the greatest increases of any offshore drill·
ing region had been the demand for ultra-deepwater rigs
in the Golden Triangle of Oil, which consisted of the
Gulf of Mexico and the waters off the coasts of South
America and West Africa (see Exhibit 5). Over the past
decade, deepwater discoveries had far outpaced those in
shallow water.3
Developing a well usually involves two main players:

the oil producer and the driller that physically drills the
well in accordance with the producer's specifications. A
small number of oil companies owned a few offshore rigs
and conducted drilling in-house. Most companies, how·
ever, outsourced the work to drilling contractors. Some
producers, known as independent producers, focused
solely on the upstream, or early stage, activities of explo-
ration and production (e.g., Anadarko). Others were
integrated multinational corporations (e.g., BP, Ex:xonMobil,
Chevron, and Shell) and state-owned companies (e.g.,
Brazil's Petrobras and Saudi Arabia's Aramco) that al so
performed downstream or later stage activities, such as
refining and marketing of the extracted oil and gas.
Oil exploration began with geological and seismo-
logical research on a potential well. Next was the pur-
chase or lease of the promising ocean terrain, almost
always from governments. Once sufficient due diligence
was completed and the rights to explore the site were
secured, producers typically contracted with drillers
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ExhibitS The Golden Triangle of Oil That Drove Ultra-
Deepwater (UDW) Demand Growth 2009-2014
It o I E. Africa
Other/Yard Au•tralia
S . America
90
•
37 • PACD Active
_ _ Basins
, ... 2009- .,--20-14L-,1
68
~ D OtherUDW
.____, _ Demand Basins
r'i 2009':-".,., ... 20-14.,,
T otailncrease in UDW
Rig Count • 96
PACD Active Basin
Increase in UOW Rjg
Count• 53
Note: PACD • PacifiC OriUing; USGOM • U.S. Gulf of Mexico;
Mex. s Mexico; carib. = the uribbeao; Med • the Mediterraneao;
M.E. • Middle Ea5!

Soutce: "Uit,....Oetpwat .. Dtmand Growth; ODS-Petrodata. Inc.
accessed April12. 201 S; Company analysis.
to driU exploratory wells. If the results were encourag-
ing, drilling began on development wells in the area for
eventual oil extraction. How quickly drilling, and then
extraction, could be accomplished depended on the
supporting infrastructure (e.g .. , pipelines connecting to
processing facilities) around the drilling site, weather
conditions, and geological characteristics. Another fac-
tor was productivity, which was a function of the drill-
ing technology used and the working experience of the
producer-drilling teams.
Offshore drilling typically used three types of rigs:
jack-ups, semi-submersibles, and drillships. Jack-ups
were used in shallow water (up to approximately 0.12 kms
of water), and their operating deck was supported by
multiple legs that extended down to the ocean floor.
Semi-submersibles (semis) could operate in water
depths of up to 3 kms. They floated on submerged pon-
toons with an operating deck that was well above the
water's surface. Drillships could operate in water depths
of up to 3.6 kms. They looked like large, ocean-going
freighters with a drilling derrick mounted in the centre
of the ship. They offered greater mobility and deck
space than semis and were therefore often preferred
in remote locations. Their larger size also allowed
them to provide greater operational efficiency through
enhan cements such as dual derricks• and additional
drilling equipment.
Drillers competed to lease their rigs to producers.
The drillers were usually paid based on day rates,5 which
varied widely across rig types. Deepwater oil reserves

were much more difficult to tap and required more
advanced equipment and expertise than some other
locations. As a result, day rates for semis and drillships
could be three to five times higher than jack-up rates.
Day rates also varied in relation to market conditions
and could be further differentiated by the quality and
efficiency of the drilling rigs and services, which were
often the result of technological and processing innova-
tions that could ultimately provide lower total drilling
costs fo r the producer (see Exhibit 6). Day rates were
usually locked-in through negotiated contracts, vith the
duration of the contracts and the lead time decided on
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Exhibit 6 Day Rate Trends for Floating Rigs by Rig Quality
(2012-2014)
800
750
700
:0 650
c

:i
g600
~
"" 550
~ .,
10 500
a::
i;'
0 450
400
350
300
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• -.........:: •
•
Jan-12 Mar-12 Jun-12 Sep-12 Dec- 12 Mar-13 Jun-13 Sep-13
Dec-13 M ar-1 4 Jun- 14 Sep-14
Fixture Date
Note: Analysis uses publicly avail.ble dota; includes rigs with
water depth capabi~ty g reater than 1.5 kms and contract day
rate ,.venue from mutual
contracts great« than one )'fllr.
Source: 'Trends fa< Floating Rigs by RigType,"oos-
Petrodata,lnc.. accessed April12. 2015; Ca<npany analysis.
prior to the start of the contract. However, day rates also
fluctuated with market conditions.
Many factors could affect a producer's choice of
driller. For example, national oil companies often held
public tenders and chose drillers based on the rig's suit-
ability and the day rate. International oil companies
had been known to be much more reliant on existing
relationships.' Because relocating rigs was costly and
time-consuming/ producers seeking to develop wells in
a certain region were more likely to contract a driller that
already had the required type of rig ready in the area. In
certain geographic locations, government regulation and
local content criteria could be barriers to entry, thereby
playing a significant role in the selection of a drilling
contractor.
Rigs that were not leased out were usually "stacked"
(i.e., idle), or taken out of service, by the driller to mini -

mize operating costs. A "hot-stacked" rig remained fully
crewed, standing by, ready for work if a contract could be
obtained, and the downtime was used for maintenance
and repairs; a "warm-stacked" rig retained some of the
crew and underwent a reduced level of maintenance and
repairs; and a "cold-stacked" rig was completely vacated
and its doors welded shut.•
The offshore driUing industry rose and fell with oil
prices (see Exhibit 4). The early 1970s witnessed a spike
in oil prices due to actions by the Organization of the
Petroleum Exporting Countries (OPEC) that increased
the supply of offshore rigs as drillers rushed to meet the
increase in drilling demand. The industry later suffered
an overcapacity of r igs when prices came back down
during the mid-1970s.9 Such cycles continued with the
oil price spike in 1979, its collapse in early 1986, and its
recovery in 1987. Oil prices remained depressed during
the 1990s until 1998, due to the economic slowdown in
Asia, then started climbing in the ea rly 2000s, which
pushed utilization rates, and thereby day rates, to histor-
ical highs. The financial crisis that started in 2008 caused
utilization rates and day rates to decline sharply again,
as oil prices fell below $40 per barrel from their peak of
$140 per barrel a year earlier.10
Players in the offshore drilling industry included
both diversified drillers (e.g., Transocean, Sead rill,
Ensco, Noble, Diamond, Rowan, and Atwood) and
niche drillers (e.g., Ocean Rig). Larger, diversified
drillers had fleets that included rigs of various types
and typically had a broader geographic presence (see
Exhibit 7).
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Case 11: Pacific Drilling: t he Preferred Offshore Driller C-153
Exhibit 7 Profiles of Pacific Drilling's competitors
Transocean
Seadrill
Ensco
Noble
Diamond
Rowan
Atwood
Ocean Rig
Transocean operated the largest fleet in the offshore drilling

industry with B5 rigs (15 jack-ups, 39 semi-submersibles,
and 31 drillships) with an average age of 17 years. The
company's market capitalization was approximately $6.B
billion,
which was the second largest in the industry. it had an
operational presence in the waters of the United States. Norway,
the United Klngdom, West Africa, Brazil South East Asia, and
Australia. Over the past frve years. the company had de·
livered operating margins of about 22 per cent. which was
below the industry average. The company's strategy was to
upgrade its fleet and divest its non-core assets.
Seadrill operated 57 rigs (25 jack-ups, 15 semi-submersibles,
and 17 drillships). With an average age of 3.4 years. It was
one of the youngest fleets in the industry. The company's
market capitalization was S5.9 billion. Over the past five years,
the company had also had the second-highest operating margins
in the industry at about 40 per cent It had an opera-
tional presence in the waters of the United States, Mexico,
Norway, Brazil, West Africa, the Middle East. and Asia Pacific.
Its strategy was to maintain its technology advantage by
continuing to invest heavily in fleet renewal and growth.
Ensco operated 74 rigs (46 jack-ups, 1B semi-submersibles, and
10 drillships) with an average age of 19.6 years. The
company's market capitalization of $7.1 billion was the largest
in the industry, and it generated average operating
margins of 40 percent over the previous five years. It had an
operational presence in the waters of the United States,

Brazil, the Mediterranean, the Middle East, Africa, Europe, and
Asia Pacific. Its strategy was to update its fleet, invest in
employee training, and maintain its d iverse geographic
presence.
Noble operated 39 rigs (19 jack-ups, 11 semi-submersibles, and
nine drillships) with an average age of 15.B years, which
made It the second oldest fleet in the industry. The company's
market capitalization was $4.4 billion. It had a diverse op-
erational presence with rigs operating in the waters of the
United States, Brazil, Mexico, the United Kingdom, the Middle
East. Africa, and Australia. The company performed just below
the industry average, delivering operating margins of
around 27 per cent over the previous five years. Its strategy was
to update its fleet, invest In employee training, and
maintain its diverse geographic presence.
Diamond operated 41 rigs (six jack-ups, 30 semi-submersibles,
and five drillships) with an average age of 30.4 years,
which made it the oldest fleet in the industry. The company's
market capitalization was S5.3 billion. Over the previous
five years, the company delivered operating margins of about 31
per cent. which was in line with the industry average.
The company had a very low level of debt relative to its size
and in comparison to its peers. At the same time, its older
rigs enabled the company to be very competitive on rig pricing.
The company strategy was to maintain its attractive
pricing and its financial strength.
Rowan operated 34 rigs (30 jack-ups and four drillships) with
an average age of 16.4 years. The company's market capi·
talization was $2.9 billion. It operated rigs in the waters of the

United States. Saudi Arabia, the United Klngdom, Norway,
and Malaysia. The company generated average operating
margins of about 23 per cent over the previous five years. The
company's strategy focus was to maintain its diverse geographic
presence, be more cost-effective, and execute better.
Atwood operated 14 rigs (five jack-ups, five semi-submersibles,
and four drillships) with an average age o/9.6 years. The
company's market capitalization was S 1.9 biD ion. It had an
international presence, with rigs in the waters of the United
States,
Australia, Equatorial Guinea, and Thailand. The company
achieved the highest operating margins in the industry over the
previous five years at about 44 per cerrt Its strategy was to
continue growing while maintaining its operational efficiency.
Ocean Rig operated 13 rigs and focused on drilling in deeper
waters (two semi-submersibles and 11 drillships) with an
average age of 3.3 years. The company's market capitalization
was $1.2 billion. It had a rig presence in the waters of
Brazil, Angola, Norway, and Ireland. Its operating margins were
at the industry average of approximately 30 per cent.
The company's strategic focus was to grow its fleet of high-
specification drilling rigs and to broaden its geographic reach.
Source: "'il Drillers," ODS·Petrodata, accessed April 12, 20 IS;
Yahoo finance; company analysi~
Chris Beckett: CEO had been constru cted in South Korea
at Samsung
Heavy Industries, one of the three largest shipyards in
the world. At th e same time, Beckett was approached
by !dan Ofer, an Israeli tycoon and the principal of

Tanker Pacifi c. Ofer asked Beckett to be the company's
ftrst employee and to lead the development of Pacific
Drilling as CEO. Beckett, a 2002 MBA graduate from
Rice University in Texas, had previously been the head
o f corporate planning at Transocean, a strategy consul-
tant at Mc Kinsey, and the U.S. land seismic manager
at Schlumberger.
and the First Employee
With the initial purchase of a drillship under construc-
tion, Paci fic Drilling was founded in 2006 as a subsid-
iary of Ta nker Pacific, one of the largest tanker fleet
owners in the world. After ordering a second rig in
2007, the company transferred its rigs to a joint venture
with 50-50 ownership with Transocean. In 2008, Pacific
Drilli ng expanded its activities b eyond the joint ven-
ture to in clude fo ur ultra-deepwater drillships, which
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.~Cc.psc t.an.&mi~~'n'e.dwflJ.ktD-·C'~~-..,~~~ ........ ~~...--..
Exhibit 8 Fleet Composition by Rig Capability and Type
59%
• High Spec 1:] Standard Spec 0 Low Spec 0 Jack-up
Source: Company documents;'Fieet Composition by Rig
capability; 005-Petrodata.lnc. accessed April12, 2015.

As the CEO of a start-up, Beckett challenged the
industry's conventional wisdom:
Back to 2004 and 2005, the industry was coming out of
the downturn . ... There was a belief in most of the estab-
lished drillers that they would sit on what they had, and
they would own the market. They would have a strong
market position. There was an absolutely strong belief
that nobody from outside could enter the industry. No
clients would take the risk to work with a new driller
without any proven record. Also, no lenders would take
the risk to build several-hundred-million-dollar assets
with a new player.
Despite huge challenges and personal risks, Beckett
believed that the offshore drilling industry was changing
and provided great opportunity for a start-up such as
Pacific Drilling, which focused on premier technology
and ultra-deepwater drilling. In particular, he noted:
When we started Pacific Drilling, it was with the view that
the assets that were being designed, built, and delivered
into the market around 2005 and 2006 onwards were, for
the first time in the industry, explicitly supposed to out-
compete those of the previous generation by being more
efficient: by reducing the time to drill a welL A lot of the
incumbents missed that as a fundamental change, and
they believed that if they didn't build rigs then nobody
would build rigs and that they could continue with the
technology that they had and control the market. What
happens in most industries is that somebody comes in from
the outside and delivers the technology to the market place
and supersedes them by using disruptive technology.
In November 2014, Beckett won the Ernst & Young (EY)

Entrepreneur of the Year National Award in the Energy,
Cleantech, and Natural Resources category for his lead-
ership in growing the start-up company into a highly
respected niche player in the offshore drilling market.
"Chris Beckett is the definition of a high-growth entre-
preneur," said Mike Kacsmar, EY Entrepreneur of the
Year Americas program director. "He's grown a world-
class team based on that entrepreneurial spirit, and he
encouraged his employees to make an impact by iden-
tifying novel approaches and seeing those ideas through
to implementation.""
Firm Strategy
Beckett strongly believed that the new generation of rigs
would be fundamentally more efficient than the existing
generation. Over time, the previous generation would
become obsolete. Therefore, his vision of Pacific Drilling
was that of a preferred, high-specification, floating-
rig drilling contractor. The strategy was to use its con-
sistent fleet of ultra-deepwater dr illships, which were
built by the top-of-the-class shipyard Samsung Heavy
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Exhibit 9 Number of Floating Rigs in Global Fleet by Delivery
Year (1971 - 2014)
30
25
20
15
10
5 f--1
0 Inn m •• 1
•
1111 •••
V)
00
o-
•
I I•••• •
§ 8 0 0
<t
0
N N N N
Source< Company documents;•Fioating Rigs by Delivery Year;
ODS·Petrodata, Inc., accessed April12, 201S.

industries, outfitted with the newest drilling packages
by National Oilwell Varco, and managed by a highly
experienced team to provide differentiated drilling ser -
vices for its customers. This focus gave Pacific Drilling
a strong competitive advantage over companies such as
Transocean, which was more diversified and less focused
(see Exhibits 8 and 9). Beckett explained his vision of
the company:
The benefit that we had and that we foresaw for Pacific
Drilling was to be focused on one asset class and not allow
ourselves to be dragged into other asset classes. We could
therefore optimize our maintenance systems, procurement,
operating programs, and safety programs to deliver the
best results with this orre asset class.
In 2008, Beckett and his team prepared a thorough
technical and safety-drilling manual, but the industry
did not seem ready for what Pacific Drilling was offer-
ing. One potential client that Beckett pursued requested
that the company rework its manual and prepare a new
proposal. Saddled with debt and yet to book its first
customer, Pacific Drilling considered the prospect of a
compromise by revising the manual to align with the
standard industry practices. However, Beckett and his
team knew that the compromise would mean losing
what they believed to be the company's key differenti-
ator. So they instead held firm and asked the customer
to reconsider.
That potential client was Chevron, the first and ulti-
mately most supportive customer throughout Pacific
Drilling's growth, eventually contracting more than half
of the company's drillships. As Chevron officials later
admitted, the original manual that had been proposed

was among the best they had ever seen. Beckett reflected
on that challenging but rewarding situation:
So we were able to build a relationship with Chevron based
on relatioruhips we had in previous companies. They knew
the people they were dealing with, and they could get com-
fortable that those p eople would be committed to deliv-
ering the product and service quality. They could look at
who the finan cial backers were and where we were build-
ing rigs, and all the associated pieces came to a comfort
factor that we would do what we planned to do.
The collaboration with Chevron also yielded access
to a technological innovation: dual -gradient drill-
ing (DGD), a process that enabled an oil company to
access reservoirs that had previously been considered
"undrillable." Unlike conventional drilling that used only
one drilling fluid, DGD employed two different fluids
in the wellbore-one in the drilling riser, with below-
average density, and the other below the wellhead, with
above-average density. Using DGD allowed the driller
to overcome narrow pore pressure fracture gradient
margins and to drill larger and deeper holes using fewer
casing strings. It also helped the driller to better man-
age downhole pressure as the drill bit moved through
various types of geologies such as sand, shale, and tar
(see Exhibit 10).
DGD was technologically proven in the late 1990s;
however, it had not yet been deployed on a commercial
rig. While Chevron expected DGD to reduce the total
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C·156
Exhibit 10 Dual-Gradient Drilling
The Problem: Deep Water Challenges
Conventional drilling methods have potential challenges:
• Well control/lost cirrulation
• Challengingcementjobs
• Mechanical challenges with tight tolerance tools
• Restrictive completions
The industry is drilling even more difficult wells. We now
routinely
drill nearly •un-drillable" wells:
• More than 9,000.metre well depth
• More than 1,800-metre water depth

New floating rigscapable of drilling to 12,()()()-metre well
depth
enable the industry to attempt even more deep water projects.
Conventional Casing Program
Deepwater Casing Program
The
Solution
: Dual Gradient Drilling
Conventional Drilling Dual Gradient Drilling
With DGD, we literally
replace the mud in the
drilling riser with a
seawater-density fluid and
use a denser mud below the
mudline to achieve the
same bottom hole pressure.
Note: OGD • dual gradient drilling; ppg • pore pressure gradient

Part 4: case Studies
Source: Chevron, Dale Straub Presentation at the lntemaUonal
Association of Drilling Contractors' Dual Gradient Drilling
seminar, Madrtd, Spain (April 7, 201 4).
C..,.-uaJ~tMMC...., .......... Aia.,...~)laf•k~.-
d.W~•wldtor•pt.DwtoC'~n .....
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Case 11: Pacific Drilling: the Preferred Offshore Driller
cost to drill a well , the company had not yet worked
with a drilling contractor to fully implement the tech-
nology. Pacific Drilling management was aware of the
potential for DGD and embraced the possibilities to
work with Chevron on developing processes and pro-
cedures. It took about six months before Chevron was
comfortable that Pacific Drilling was the right partner

to commercialize DGD. leading to Pacific Drilling's
first drilling contract.
Pacific Drilling's dose relationship with Chevron
was among the few relative constants in an often vola-
tile and unpredictable market. Chevron had contracted
four drillships with Pacific Drilling to date for operations
in the Gulf of Mexico and Nigeria. The justification was
simple: Pacific Drilling rigs were equipped with the capa-
bilities that Chevron desired, and collaboration among the
companies' employees, both onshore and offshore, had
become seamless.
After Chevron had signed the frrst contract, opportu-
nities from other producers emerged for Pacific Drilling.
Chevron's willingness to repeatedly work with the new
company was an endorsement of the substantial value
that Pacific Drilling could deliver to its customers. With
a more established reputation, Pacific Drilling was able to
broaden its customer base to include Total (one drillship
in Nigeria) and Petrobras (one drillship in Brazil). By the
end of 2014, the company had signed $2.7 billion in con-
tracts (see Exhibit 11).
Working with Chevron to implement DGD also

helped Pacific Drilling improve and refine its oper-
ating and management systems. Implementation of
DGD technology demanded that Pacific Drilling work
closely with Chevron on the development of operating
procedures and employee training. At the time, Pacific
Drilling operated two drillshlps that were DGD-capable
(i.e .• the Pacific Santa Ana and Pacific Sharav). Frederic
Jacquemin, the director of the DGD program at Pacific
Drilling at the time, noted that "with DGD, integrating
Exhibit 11 Pacific Drilling Growth Profile
C-157
a new technology is not only about equipment but it is
also about defining new processes and training people:·
Although the full deployment of DGD technology
was still a work in progress, Pacific Drilling's close col -
laboration with Chevron led to a corporate emphasis on
process innovations and technological leadership. Pacific
Drilling continued to invest in technological innovation
in an effort to keep its fleet as up-to-date as possible. For
example, its newest rigs were equipped with automated
drilling systems that reduced the number of personnel

on the drilling floor, substantially improving drilling
speed while also reducing safety risks. The company
also equipped its rigs with a higher than usual amount
of drilling mud storage and processing capability, which
allowed the rig to move more quickly through the drill-
ing process and also to be more self-sufficient: a partic-
ular advantage in remote operating locations, where the
cost of support vessels was high.
Pacific Drilling im plemented SAP software on all
of its drillships to better monitor daily rig operations
and respond in real time to unforeseen problems.
Traditionally. workers on a rig monitored their tasks
using pen and paper and provided hard-copy reports to
their supervisors. The SAP software helped to continually
update information across functions during the drilling
process, improving operational efficiency. The com-
pany reduced the amount of downtime (non-operating
time due to malfunctions) and ultimately improved
safety, both of which increased profitability and benefit
to customers.
Pacific Drilling developed its own company manage-
ment system using the highest standards (see Exhibit U).
The company had the advantage of being able to imple-

ment this system from the beginning. whereas most of its
peers had to adapt management systems to their legacy
corporate practices. The company also emphasized con-
sistency in its processes and procedures. For example. the
company went through an exhaustive exercise to develop
First Quarter of 2011 Fourth Quarter of 2014
Number of rigs
Number of operating rigs
Number of drilling contracts
Contract backlog (in S billions)
Number of employees
Market capitalization (in S billions)
Souru: Company documents.
4
0

2
$1.5
Approximately 500
$2.1
8
6
6
S2.7
Approximately 1,600
$1.0
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Lan.&mill'n'ftdwna.ktD,_·C'~..,.._._,._.t...._..,.._~...,_.._

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C-158
Exhibit 12 Pacifi c Drill ing Management Syste m (Ms)
Onlhng Operations
MilfrtJme Operations

T echn1cal Support
Support Functions
a standardized framework for making operations and
maintenance decisions related to a key piece of equipment
on its rigs. When Pacific Drilling showed the framework
to its clients, it was told that no other driller had made this
type of effort to better manage the equipment.
Firm Culture and Organizational
Structure
Pacific Drilling had set clearly defined values that pro-
vided a fram ework fo r corporate decision-making and
employee beh aviour. The compan y's core principles
were cleverly embodied using the mnem onic of its name
PACIFIC (see Exhibit 13).
To build the company's legitimacy and credibil-
ity, Beckett recruited highly experienced experts vith
Exhibit 13 Pacific Drilling Compa ny Va lues

Policies
and O.rectJOn
Organization and
RHOUrce Management
Management
Monitoring, Analysis
and Improvement
proven track records from a variety of professional back-
grounds. In doing so, he aimed to fm d the best solutions
and processes for the start-up company. Beckett also
knew that in this industry, talent and connections were
key. To attract star employees, he offered promotions
from their current positions, as well as the opportunity
of a lifetime-helping to build a new company. Beckett
also promised less organizational hierarchy, and he kept
his word by creating a leaner, flatter company.
Pacific Drilling's organizational structure provided

advantages through shorter commun ications p aths,
ease of collaboration, and efficient d ecision-making
(see Exhibit 14). For example, the marketing of rigs was
traditionally done by a dedicated marketing team, which
then handed over the contract to the operations depart-
ment to run the rigs. However, the company encouraged
f roactive: Continually refining its approach to ant icipate
stakeholder needs
Accountable:
l:ustomer oriented :
Integrity:
Taking responsibility for actions and performance as individuals
and as a company
Striving to exceed customer expectations
Acting honestly and fairly in all they do
f inancially responsible: Maximizing long-term value creation
for shareholders

Innovative: Seeking creative solutions in every aspect of its
business
!;;ommunity focused: Ensuring a sustainable and positive
impact on the communities where they work
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.tllor~t~
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Exhibit 14 Pacific Drilling Organizational Chart after
Reorganization in February 2015
CEO
Chris Beckett l
SVP Corporate VPGeneral EVP&COO
VP Quality & HSE EVP&CFO
SVP Sales & Business
Services Counsel CeesVan Development
Edgar Rtncon Kinga doris Die men
Paullinlcin Paul Reese
Michael Acuff
I I I 1 I
VPHR SVP O perations Director HSE VP Treasurer
Director Sales
Ame ricas
I I I I I
Director

Director Sales
VPPSC Ope rational Directo r Q uality VPT IT & Faciltties
Europe & Afr ica
Exc elle nce
I I 1 I
Director HR Director Subsea
VP Controller
D irector Corporate
Employee Services Support Planning
I I 1
Director New D irector Technical VPAudtt &
Construction Support Compliance
I I
Director Major VP IR & Communica·
Projects tions
I I

Sr Engineering
VpTax
Advisor
Note: CEO • chief e«<utive olfar; SVP • senior Yice-pres;dent
VP ~ Yice-pres;dent EVP = executive ~t; COO • chief
ope<;oting olfKer, HSE • health. sarety, and
environment CFO • chief financial officer; HR • human
resources; PSC = procurement and supply chain; IT •
Information tedvdogy: lR • if"'YeStor relations; Sf a senior.
its marketing and operations teams to work together with
the client from the first stage of negotiation until the end
of the drilling campaign, which resulted in greater con-
sistency between what the marketing team promised and
what was actually done, increasing the company's credi-
bility and building stronger relationships with the client.
Beckett also recognized that the company needed
a culture of entrepreneurship and accountability. 12
Employees were empowered to make suggestions and
take ownership of processes and projects. Pacific

Drilling focused on hiring employees who fit with the
company's culture. Every potential employee was inter-
viewed by three established employees. Through this
process, the company selected recruits who were ded-
icated to performing above the average and who had
enthusiasm for building a unique company. These qual-
ities were reflected in a commitment the company made
to its employees: "Pacific Drilling is committed to be the
employer of choice in the offshore drilling industry and
provide the tools and resources to enable its people to
deliver consistently exceptional performance:'
Given the inherently dangerous nature of the indus-
try, Beckett and his management team consciously strived
to develop a culture of safety, even at the expense of
stopping drilling operations. The company implemented
the Stop Work Obligation, which dictated that it was
the responsibility and duty of any individual to stop any
work that the employee felt had an unacceptable level of
risk or other concern . This directive went beyond the
traditional Stop Work Authority that was an industry
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.._.or•pt. OwtoC'~n.....__..,..,_.,.~_,hc ~h--C'Itool:....wlor~t~

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.~ee..z.
Lan.&molll'n'e.dwna.ktD,_·C'~..,.._._,._.t........,.,.._~,.._.._
C· 160
Exhibit 15 Pacific Drilling's Safety Performance as of The End
of2014
2.5
2.0
~ 1.5 !:::;
1.0
0.5
2008 2009 2010

20 11 2012 2013 2014
I• PACD LTIF 0 IADC LTIF I
Notes:
lost Timelncidenu Frequency (LnFI Is the number of lost-time
incidenu per m~lion work hours.
• International Association of Or'dling Contractors OAOCI data
include all land and water regions up to and including 2012.
• IAOC data only include wa1er regions who~ Paofic DnUing
(PoCD) was working in 2013 and 2014 fo.e.. the United Stat~
Africa. and South America) •
• IAOC data for 20141$ up to the1hlrd quarter~ar-to-clate
information only. FuU 2014data -re unavaaableat the time of
writing.
Key 2014 safe<y achleverner>ts:
• Pacific Bora a<hiewd 3.75 years without an lJ1 and 1.75 yeon
without a recordable incident.
• Pacific Sciro«o a<hiewd 3.5 years without an m and 1.5 years
without a recordable incident.
• Pacific Khamsin a<hiewd 1 year without an m and almost 1
year without a recordable incident.
• Pacific Sharav had ze<o llls since commer>cing contract.
• •A• rating on the ChevYOn Contractor ~aim. Environmen~

and Safety (HES) Management (CHESM) program in both
dHpwa1er and the Nigerian bu,.ness units.
practice and gave employees the right to stop work but
didn't require them to do so.
In an industry where producers valued drillers' rep·
utation for safety, Pacific Drilling had achieved multiple
years without any lost-time incidents on several rigs. Its
safety performance had been recognized with an "A" rat-
ing on the Chevron Contractor Health, Environment, and
Safety Management program in the Gulf of Mexico and in
Nigeria. Pacific Drilling was also the first drilling con-
tractor to certify its safety and environmental management
systems with the Center for Offshore Safety (see Exhibit 15).
Challenges
Growth and Customer Base Challenges
Beckett and his team had planned to expand the com-
pany's fleet from the current eight drillships to 12.
The need to contract out these ships pushed the com-
pany to broaden its customer base beyond relying on

Chevron. In this industry, producers had usually been
more likely to contract drillers with whom they had
worked with before, in part because of the efficiency
gained from a prior working relationship.
As Pacific Drilling sought to broaden its customer
base, there was some concern that the company was
tied too closely to Chevron. The technology, processes,
and culture that Pacific Drilling had developed were
significantly influenced by the company's close collab-
oration with Chevron. There was a concern that effi.
ciency would be lost, even if only temporarily, when
changing to a different drilling partnership. Evidence
had shown that a given producer demonstrated pro-
ductivity gains in a partnership with one driller,
resulting from having acqui red "relationship-specific"
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Case 11: Pacific Drilling: the Preferred Offshore Driller
capabilities over the time that the two companies had
worked together. However, these gains often did not
translate to the same level of productivity gains in part-
nerships with new drillers,u which seemed to explain
Chevron's preference to continue to contract Pacific
DrilJing. Chevron's support was fundamental in Pacific
Drilling's success as a new entrant, but its ability to
grow as a more mature company was likely to be con-
strained by that very same factor.
Technology Challenges
The technology advantage that Pacific Drilling had over
competitors for deepwater drillships was also being
challenged as other drillers upgraded their floater fleets.
Competitors' rigs scheduled for delivery in 2016 and 2017
would have incremental technological advantages over
Pacific Drilling's first rig.
Market Challenges
The price of oil had been tumbling since mid-2014, while
North American shale oil production had grown rap-
idly and global energy demand had been weakening. For

Exhibit 16 Floating Rig Utilization after 1985 by Build Cycle
Year delivered
C-16 1
offshore drillers. existing contracts that had been nearing
completion had been less likely to be extended. For avail -
able rigs, competition among drillers became intense as
day rates were pushed down.
Over the previous decade, the number of offshore
rigs worldwide had increased from approximately 670 to
950. Although the offshore floating rig count increased
from approximately 200 to 350 from 2004 to late 2014,
average utilization rates also increased over the same
time period, from around 77 per cent to 86 per cent.
Historically, newer rigs competed down in their day
rates, causing older rigs to be stacked, either perma-
nently or until the market recovered. Recently, though,
the industry seemed to have undergone a fundamental
shift. Once demand began collapsing in 2014, there was
an overcapacity of deepwater rigs, and drillers struggled
to find new contracts for their available rigs. The current
industry downturn and significant rig oversupply led to

deepwater drillships and semis being cold-stacked fo r
the first time in history (see Exhibit 16).
Pacific Drilling's immediate issue was to secure a
contract on two of its drillships, Pacific Meltem and
- <1978 - 1979- 1997 - 1998-2006 - >2007
SourU! ~ny documents.
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Pacific Mistral, that had been sitting idle. Because
modern drillships had rarely been cold-stacked, keep·
ing the crew on board was costly. The company was
also concerned about two additional drillshlps: Pacific
Khamsin, which would come off contract in late 2015,
and Pacific Zonda, scheduled for delivery from the
shipyard in late 2015.
significantly below market rates to win the few new jobs
available. Looking forward, Pacific Drilling had a signif-
icant number of high-specification floating rigs available
to be contracted. Although there had been weak demand
for very high-specification rigs, there had also been rel-
atively limited supply, which supported the company's
contracting prospects.
Strategic Choices
Pacific Drilling had come to a critical juncture, and
important decisions had to be made. As a more
mature company, Pacific Drilling had been confront-
ing a different competitive landscape. During the past
year, very few new contracts had been awarded in the

industry. Some of the company's peers were willing to bid
Overcoming challenges had been nothing new for
Beckett. Yet, with the challenging market environ-
ment and other constraints, Beckett made the follow-
ing statement in a letter to employees: "Despite the
weakening market, we expect further growth in 2015,
but we must continue to execute well on our growth
plans and secure new contracts to deliver on this
expectation:·
NOTES
1. All currency amounts are In USS unless
otherwise specified.
2. Brad Plumer, 'Why Oil Prices Keep Falling-
And Throwing the World Into Turmoil; Vox
Media Inc., updated January 23, 2015,
accessed April12. 2015, www.vox.com/2014
112/16/7401705/oil-prices· falling.
3. Deutsche Bank Markets Research, "What Is

New? Key Stats & E~t to Watch," 0./frdd
Services Chronicle, June 23, 2014.
4. A derrick is a pyramid-shaped structure
above the rig floor where the crown block.
monkey board, and racking board are
supported. Dual derricks have two drilling
units on one hull.
5. Drillers usually charge oil producers on a
daily work rate, which varies dependong
on the location, the type of rig, and the
market conditions. For example. by March
2015, Pacific Drilling's average day rate was
$558,000 and Diamond Offshore's rate was
$450,000.
6. Ramon (asadesus-Masanel~ Kenneth
Corts, and Joseph McElroy, TM Offshor"
Driling Industry in 2011 (Boston, MA: Harvard
Business Schoo~ 2011). Available from lvey

Publishing. product no. nt543.
7. AccO<ding to casadesus-Masanel~ CO<ts,
and McElroy, moving a jack-up rig from
the Gulf or Mexico to the North Sea took
about a month, and mobilization alone
cost bl!tween S2 million and S5 million,
l!Xdusive of day rates.
8. As a cost-reduction step, a cold-stacked
rig is often stored in a harbour, shipyard,
or designated offshore area because
its contracting prospects look bleak.
It will be out of service for extended
periods of time and may not bl! actively
marketed.
9. Robl!rt 8. Barsky and Lutz Kilian, "Oil
and the Mac.roeconomy Since the 1970s;
Journal of Economk PM~Iws 18, no. 4
(fall, 2004): 115-134.

10. C.sadesus-Masan~~ Corts, and McElroy,
op. dt.
11. Ernst & Young Global Umited. "Chris Beckett.
CEO of Paofk Dnlling. Named EY EntreprenEur
of the Year• 2014 National Energy, Cleantech
and Natural Resources AwNd Winne(,'
November tS. 2014, accessed April12. 2015,
www.ey.comiUS/en/Newsroom/News
-<~-lJS.EOY-20J4.Chris-8eck
-Paclic-Dnlll~ward'lmner.
12. Based on infO<matlon from the company's
Media and Public R~tions department
13. Ryan Kellogg, "Learning by Drilling:
Interfirm Learning and Relationship
Persistence In the Texas Ollpatch." Quarterly
Joumol of Economics 126 (2011): 1961-2004.
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