Best setting anchors in the Hugoton basin.

In the midst of one of the most ferocious cycles ever faced in the oil service industry and with capital markets in disarray, these are unscripted times, to say the least. The natural inclination is to focus on problems, dwell on them, and in the process stifle the ability to map a way forward. Focusing on matters that are within the company’s control can uncover answers that already reside within the organization, but in places and through a process that is often neglected.

Solutions may lie at the grassroots level within the workforce. Employees who spend 14-hour days in the field are deeply connected to the issues that need to be solved.

To tap this resource, senior management must fully buy into a fundamental axiom — shareholders’ and lenders’ capital belongs in the field, not in the corporate suite. This is a fundamental shift in the way senior management runs its business and deals with its employees.

Voice of experience

The Harrington and Company Energy Vulture funds were established in 1986 and by 1990 consisted of four distinct business units in four cities, all with highly differentiated business focuses. At a time when the fax machine and FedEx were state-of-the art communication mechanisms, constant travel among the four companies quickly revealed the importance of communication and the perils of shadow organizations.

Management by competence (MBC) became critical. One way to think of MBC is in direct opposition to management by objectives (MBO). More often than not, MBO has been applied by CEOs dictating operational and financial decisions arrived at by the corporate office. MBO mandates to business units and their grassroots employees what is to be accomplished and by what date. As a reward, senior management, often with the acquiescence of a rubber- stamping board of directors, are voted high six- and seven-figure salaries and bonuses, lavish travel budgets, and other assorted perks that represent very little value added to the company itself.

MBC, on the other hand, defines the strengths of employees at every level, plays to those strengths, and uses the team and team forums to compensate for individual weaknesses. Corporate management is not telling the business units and its employees what to do; it is empowering teams at each level to determine themselves what should be done. In this case, senior management and the CEO are the processing agents who are guided by a very different board of directors. An MBC board is made up of complimentary skillsets. Rather than a CEO’s cronies rubber-stamping what the CEO decides, the board’s input is based on its own experiences, knowledge, and wisdom. The board becomes a “second staff” for the CEO. The same teambased solution-driven spirit is used at the business unit level.

Every employee needs to have a voice. Much can be learned from the tool pushers whose daily contact with the customers and rig operators form the core of a company’s knowledge base. They deserve a forum for communicating with one other and with corporate management.

Making the change

Best Energy Services quickly made the transition from MBO to MBC consequent to a board-initiated management swap undertaken in October 2008.

Best was formed in February of last year as a roll-up of three distinct business units:

1. BestWell Services (BWS) in Liberal, Kansas, a 25-rig workover concern founded in 1991 by second generation oil field workover veteran Tony Bruce, who now serves as president and COO;

2. Bob Beeman Drilling, a Moab, Utah-based contract driller of oil and gas wells, water wells, and minerals founded in 1976, and being very effectively run by the founder’s son, Todd Beeman; and

3. The assets of a crew house rental/manufacturing concern contributed to the roll-up by former management as their boot for stock in the combined company.

In September of last year, the outside directors became increasingly concerned about the newly formed company’s direction. The specific concerns were that:

• People in acquired business units were not being properly engaged; • General and administrative expense (G&A) was bloated;

• Too many new acquisitions were being worked on without the company’s having fully digested the acquired units;

• Numbers were not being met; and

• The market was rapidly falling.

Since making the management swap in mid-October, G&A has been cut US $4 million from a 2008 level of $5.4 million to its current cash run rate of $1.4 million. New management abandoned MBO policies that were uneconomic, pushed down work flows, and gave up a 16,000-sq-ft office in favor of a sublet space at roughly 15% of the cost. Also, team forums were rapidly initiated among all of the operating units, within corporate, and within the largest division, BWS.

Much of the success is due to a dedicated and loyal workforce in each of its acquired business units. Each of these heretofore privately held companies was tightly run, and efforts have been made to preserve embedded culture. They are all now fully engaged in their own success with stock options for all key individuals and are contributing to the success of other business units as well.

At BWS, employees have weathered the seismic event of a 100% utilized rig fleet going to as low as 25% in a matter of weeks just after the new year. Today, the company has increased its market share from 38% to nearly 80% with only a 10% reduction in prices, and its utilization has doubled. Best has actually enhanced the company’s relationships with customers by promoting an employee to fill the role of full-time in-house certified health, safety, and environment specialist.

Beeman, meanwhile, is contributing positive cash flow with only one out of nine rigs working during the winter and spring seasons.

Corporately, to increase market awareness, the company recently launched a Web-centric and field-centric marketing effort with a customer-and investor friendly Web site that showcases both operations and people. None of those entities had done marketing in the past.

Skeptics within the business units when the management swap occurred have become fans of the new approach. The company has a new esprit de corps, with everyone participating in the company’s success. The business units do budgets with corporate guidance, and despite a ferocious cycle, the company is meeting its numbers now.

PNC Credit not only stuck with the company through this difficult period but agreed to a new credit agreement with an interest rate that stays at 5.75%. The company’s collateral values are protected, and borrowing capacity has actually expanded. That is a far cry from a legacy of Best defaulting under the old agreement less than 90 days after the formation of the company and a bank ready to pull the credit.

Shareholders have embraced the “back-to-basics” approach and the focus on placing financial resources at the field level where they belong.

In the next month the company will institute a companywide planning session for employees in all of the business units. As in team forums, each employee will have a voice, and their ideas and the collective of the team forum will surely feed new ideas through the company. The message is simple:

• Listen to what your people have to say and be guided by their experience and wisdom;

• Engage all in team forums where ideas can be responsibly vetted and implemented; and

• Let the money provided by shareholders and the bank stay where it belongs — in the field with the grassroots workers, not in the corporate suite.