Chiles Offshore Corporation
Chiles Offshore Corporation
Sales: $44.45 million
Stock Exchanges: American
SICs: 1381 Drilling Oil & Gas Wells
Chiles Offshore Corporation is an international provider of offshore contract drilling and well workover services for major and independent oil and gas companies. Chiles owns and operates a fleet of offshore drilling rigs, providing new well drilling services as well as workover or enhancement and maintenance services for existing wells. The bulk of the company’s drilling activities are conducted in the U.S. Gulf of Mexico and offshore near Nigeria on tracts leased by the company’s customers.
Chiles Offshore informally traces its corporate lineage to the 1946 formation of Chiles Drilling Company, a supplier of contract drilling services for oil and gas companies operating in southern Texas. In 1980 Chiles began operating in the U.S. Gulf of Mexico through various limited partnerships, including Chiles Offshore, Inc. and other predecessor companies.
In 1980, 32-year-old William E. Chiles became president and chief operating officer of Chiles Offshore at a time when several drilling companies were setting up shop in the U.S. Gulf region. In 1981 C. Ray Bearden, at the age of 34, joined the company as vice-president of operations.
In April 1987, with energy prices stabilizing and the market for drilling services improving after a two-year lull, the company was incorporated as Chiles-Alexander International, Inc., with seven jackup drilling rigs and two platform rigs. The following year, the company sold its two platform rigs, ending the year with a fleet of seven jackup rigs. Chiles finances took a beating its first full year, with the company losing $7.2 million on annual sales of nearly $29 million.
Losses continued to mount in 1989, and, after a trio of quarterly deficits in December of that year, the company began a four-month-long refinancing program, which included the establishment of a $35 million line of credit with a Norwegian bank. The company also initiated a private placement of additional common stock, receiving a net income of $48.6 million, which helped Chiles post its first annual profit in 1989 and earn $7.7 million on sales of $27.2 million.
Through the private placement of stock, control of 80 percent of Chiles passed into the hands of three companies which had been involved with Chiles-Alexander since 1987. Those companies included P.A.J.W. Corporation, a firm wholly owned by Gordon Getty of the former Getty Oil Company; OMI Investments Inc., a division of the diversified and publicly held OMI International Corporation which controlled one of the largest oil tanker operations in the United States; and Anders Wilhelmsen, a Norwegian shipping company which gained a 14 percent interest in Chiles as part of what became a 23 percent foreign investment in the drilling firm.
As part of the company’s refinancing program, the operating subsidiary, Chiles-Alexander Offshore, Inc., was merged into the parent company, and by March 1990 all outstanding shares of Chiles preferred stock were reclassified into common stock. With the oil service and drilling stock markets gaining momentum, the company changed its name to Chiles Offshore Corporation in April 1990, and the following month went public in order to finance a rig fleet expansion and refurbishing program. Chiles earned $64.6 million through an offering of 5.7 million shares of common stock, and with additional loans totaling more than $60 million, the company acquired ten used jackup drilling rigs and one used semi-submersible drilling rig in four separate 1990 purchases adding up to more than $128 million.
During its first year as a public corporation, Chiles operated exclusively in the U.S. Gulf of Mexico, where natural gas represented the greatest potential for discovery. During the winter of 1990, however, slumping natural gas prices forced several smaller and independent oil concerns to suspend drilling plans, and the losses Chiles anticipated from the expansion of its rig fleet were magnified. Decreased demand for drilling services contributed to a 1990 fourth quarter loss of $1.8 million and a loss for the year of $2.7 million, despite an increase in annual revenues which nearly doubled to $50.4 million.
With the slump in drilling activity in the U.S. Gulf region, Chiles began seeking overseas work and branching into the international arena. In February 1991 the company formed the wholly owned subsidiary, Chiles Offshore International, Inc., to operate one of the company’s jackup drilling rigs offshore near Trinidad. That month the company also formed Chiles Offshore Africa, Inc., another wholly owned subsidiary, for the purpose of providing services offshore near West Africa.
During mid-1991 Chiles relocated one of its rigs to Trinidad, where it had a drilling contract with Royal Dutch/Shell, and secured additional loans to modify drilling rigs earmarked for West Africa. By September 1991 Chiles had joined a mass exodus out of the U.S. Gulf region which had been prompted by low natural gas prices, a rapidly declining availability of drilling jobs, and a highly competitive bidding arena.
During the last six months of 1991 Chiles redeployed four rigs to offshore Nigeria, three of which traveled by a single heavy-lift ship in one of the industry’s largest rig transfers ever. By the end of the year Chiles had five rigs working in Nigeria and a sixth rig en route to West Africa.
During 1991 Chiles sold four of its rigs, including its semi-submersible rig and three of its platform rigs, for a total of $44 million. Despite the income from rig sales and increases in annual revenues which climbed to 52.7 million in 1991, however, Chiles lost $25.8 million for the year. The auditor’s report in Chiles 1991 annual report noted that “the industry conditions which contributed to these losses … continue to deteriorate. In addition, the company will not be able to remain in compliance with certain terms and covenants” of its loan agreements. The company’s losses, stemming from dismal market conditions in the Gulf of Mexico and up-front costs to modify and move rigs to international markets, led the company’s auditors to conclude that there was “substantial doubt as to the Company’s ability to continue as a going concern.”
By the end of 1991 Chiles Offshore had a long-term debt of more than $75 million, with sizable loan payments scheduled for 1992. In December 1991 the company secured waivers on some of its loan covenants which had been violated after Chiles total debt to total assets ratio fell below a stipulated level. For the year, Chiles lost more than $25 million on revenues of $52.7 million.
The company began 1992 with four rigs operating under contract in West Africa, five rigs under contract in the U.S. Gulf of Mexico, and five rigs inactive, including one rig awaiting work offshore near Trinidad.
In March 1992 the company formed the wholly owned subsidiary Chiles Offshore Mexico, Inc. to pursue drilling opportunities in Mexico and South America. By the end of the month the company faced a quarterly loss of $3.32 million, and again fell into technical default on certain loan covenants.
During the first part of 1992 rapidly deteriorating industry conditions forced Chiles to take cost-cutting measures, and as the company’s rigs came off contract they were cold stacked, or placed in inactive status, with idle rigs moved to a single U.S. Gulf of Mexico location and their separate drilling crews replaced by a single, smaller maintenance crew. By the end of April, seven of the company’s rigs located in the Gulf were taken out of active status. Furthermore, during the second quarter of 1992, Chiles closed its Lafayette, Louisiana, field office and reduced the number of its shore-based employees by about 30 percent. Despite these moves to cut its overhead, the company found itself in technical default on loan agreements in both April and May 1992.
With its financial situation deteriorating and a second quarter loss of $24 million looming, the company announced several changes in the company’s management. William E. Chiles resigned as president, chief executive, and a member of Chiles corporate board, and was replaced by C. Ray Bearden, vice-president of operations for Chiles Offshore and its predecessors since 1981. Marc Leland was replaced as chairperson by Win-throp A. Wyman, chief executive officer of OMI Petrolink Corporation. In addition, Robert F. Fulton, vice-president and chief financial officer since 1991, was elected to the company’s board and named a senior vice-president, replacing Mark Keller who resigned in the management realignment. As a result of the management shakeup, Chiles Offshore also expanded its board from six to eight members with the new board including a representative from each of the three major limited partnership companies, OMI, Anders Wilhelmsen, and P.A.J.W.
In early July 1992 Chiles again fell into technical default on loan agreements. The new management team responded by requesting a four-month deferral of $7 million worth of late loan payments in order to buy time to reschedule Chiles long-term debt obligations and complete a corporate recapitalization plan.
By November 1992 conditions in the drilling market had improved, allowing Chiles to reactivate two of its stacked rigs and to relocate its rig near Trinidad to the U.S. Gulf of Mexico. That month Chiles staged a secondary offering that resulted in the sale of 22.2 million shares of common stock. The offering, coming at a time when natural gas stocks were shifting back into the public’s favor while gas prices were hitting a seven-year high, netted the company $28.3 million. About half of the stock sold in the secondary offering was acquired by Chiles’ three principle limited partners.
The 1992 stock offering allowed Chiles to reduce its long-term debt by $17.3 million, bolster its working capital fund by $11 million, and keep Gulf of Mexico offshore drilling operations from sinking. At the time of the offering half of Chiles Off-shore’s 14 rigs were cold stacked, while one rig was stacked offshore near Trinidad. Only six rigs were working, two in the Gulf of Mexico and four offshore near Nigeria.
For the 1992 year Chiles lost $31.8 million on declining sales of $44.4 million, with the company’s four rigs in West Africa accounting for 71 percent of the Chiles revenues for the year. Nevertheless, the company closed the year in significantly stronger financial condition, having improved its working capital position from a negative $50 million to a positive $19 million and reduced its total debt from $75 million at the beginning of the 1992 to $49 million by year-end. The company also had rescheduled its loan repayments, which were spread out through 1997.
The company entered 1993 with a rig fleet of 14, and, as of March 1993, three of the company’s 14 rigs were operating offshore near Nigeria while five were contracted in the U.S. Gulf of Mexico. A ninth rig was available for work, while the company’s five remaining rigs stacked in either West Africa or the U.S. Gulf.
For the first quarter of 1993 Chiles lost $3.7 million, with those losses stemming largely from costs to reactivate two rigs expected to begin work in the summer of 1993. During the middle of 1993 the company announced that 12 of its 14 rigs would be working by year-end as a result of increased drilling activity worldwide.
As Chiles moved towards the mid-1990s, the company’s strategy was to pursue drilling opportunities both in the U.S. Gulf of Mexico and in international markets, with Bearden predicting profitability for Chiles if market conditions continued to improve in the U.S. Gulf of Mexico. Regardless of developments in the U.S. Gulf, Chiles anticipated ongoing dependance on its operations in Nigeria, where demand for drilling was expected to remain relatively stable.
Despite signs of improvement in the drilling market, Chiles future remained uncertain as it neared mid-decade. The company believed it had adequate working capital to do business and make loan payments through 1994, but its ability to make timely debt payments and secure other needed cash requirements beginning in 1995 hinged largely on industry conditions, which in previous recent years had been highly volatile.
Chiles Offshore International, Inc.; Chiles Offshore Africa, Inc. (Cayman); Chiles Offshore Mexico, Inc.
Calkins, Laurel Brubaker, “Oil Rigs Exit Gulf in Record Numbers,” Houston Business Journal, September 2, 1991, Section 1, p. 1.
Chiles Offshore Corporation Annual Report, Houston: Chiles Offshore Corporation, 1992.
Gill, Douglas, “Financing Strategies,” Oil and Gas Investor, April, 1991, pp. 65–69.
McNamara, Victoria, “Chiles Offshore Corp. Makes Public Stock Offering,” Houston Business Journal, April 16, 1990, Section 1, p. 15.
Payne, Chris, “Drillers Go to Wall Street as Gas Prices Rise in Gulf,” Houston Business Journal, October 19, 1992, Section 1, p. 1.
Solomon, Caleb, “Chiles Offshore Expects to Report Fourth-Period Loss,” The Wall Street Journal, March 1, 1991, Section A, p. 4F.
—Roger W. Rouland