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Questioning Market Leaders For Long Term Investors


DAILEY J. BERARD - UNIFAB INTERNATIONAL - (UFAB)
CEO Interview - published 10/23/00

DOCUMENT # LAA604

DAILEY J. BERARD is the Founder, Chairman, President and CEO of UNIFAB International, Inc. and other subsidiaries. Mr. Berard is a 49-year veteran of the oil and gas industry and has published hundreds of articles and technical papers in trade journals, industry magazines and various local, state and national publications. He is a graduate in Civil Engineering and has done graduate work in Economics. Prior to founding UNIFAB, Mr. Berard worked for Tennessee Gas Pipeline as Area Civil Engineer and as a Registered Professional Surveyor in six states, responsible for the design and construction of hundreds of miles of land, swamp and offshore pipeline. He conceived, designed and developed the use of pre-stressed concrete bulkheads and platforms, designed underwater tapping equipment, offshore pipelay stingers and pipelay tensioners; structured and operated Houston-New Orleans, Inc.; Houston Systems; and Norman Offshore Services from 1966 to 1980. Mr. Berard served in various capacities ranging from Owner, President, Director in the construction of offshore structures from Chief Engineer, General Superintendent, Vice President, Owner, President, Director in the construction of offshore pipeline, platforms, barges, drilling rigs, compressor and generator packages, production and drilling modules, quarters buildings and all related offshore service for the worldwide market. Also, he is the Founder of Uniscape, Unisep and Unifuels for specialized equipment and services, Co-Founder of a $107 million agri-fuels plant, Bank Director, Co-Founder of Inexpo and Executive Quarters. All of these endeavors were active between the years 1951 to 1980. Mr. Berard operated in foreign countries such as Nigeria, Peru, Trinidad, Iran and in Saudi Arabia under the banner of Saudi UNIFAB. He investigated the possibilities of joint-venture relationships in China, Russia, Japan, Taiwan, Indonesia and Mexico, some of which are now developing in Mexico, West Africa and Trinidad.

Sector: Oil & Gas Equipment & Services

TWST: Would you mind providing our readers with an overview of UNIFAB International?

Mr. Berard: UNIFAB was founded in 1980. It grew profitably all through the years, and in September 1997, I took the company public. Since going public, we have acquired half a dozen companies. We broadened our base during the severe downturn that materialized following our IPO. So, I was able to acquire several companies and expand our facilities. We acquired Allen Process Systems here at the Port of Iberia. That firm is involved in oil and gas separation, oil and gas dehydration, all of the activities that go with process equipment. Allen Process Systems also operates in London, and is involved in design and project management and combustion engineering services, which is engineering packaging, troubleshooting, repair and prevention. We also acquired OBI, Offshore Barges, Inc., again in the Port of Iberia. That operation is involved in drilling, rig design, fabrication, renovations and equipment refurbishments. Along with OBI, we acquired Superior Derrick Services, which operates in the manufacturing and repair of derricks, mass and substructures. The brightest star that we acquired was PIM Services in Lake Charles, which had a lease on a navy base, a deepwater facility with 40 feet of water to the Gulf of Mexico. We have since spent upwards of $20 million there. This is now one of the finest facilities in the Gulf Coast, enabling us to get into the deepwater jackets. In fact, it’s the deepest water facility along the Louisiana coast for modularization, for semi-submersibles and jack-up refurbishment work. We’re excited about this new acquisition. I see the yards at the Port of Iberia probably transitioning into modularization support services for Lake Charles and for deep water because everything seems to be going to deeper water now. Certainly, the Gulf of Mexico is going to be the hottest spot on earth. It’s a 70% natural gas province and, of course, natural gas is the fuel of the future as we try to reduce the use of oil and coal in this country. It is going to be even more pronounced for the natural gas market. I am excited about UNIFAB’s broad base of services — one-stop shopping. We are working for every major oil company, independent and domestic and in both domestic and international markets. We also have opened up a small yard in Nigeria, a transitional step into broadening our opportunities for different sources of labor because that is going to be a severe problem in the future.

TWST: What represents the largest source of revenue within your business right now?

Mr. Berard: Within our business right now, drilling activity has picked up. The jack-up barges are about 100% utilized, and the drill ships and semi-submersibles are probably 85% utilization. Drilling activities are steaming up rather well in the Gulf, and the international markets are picking up substantially. That’s the first step in a turnaround. First, the drilling takes place. Next, the platform market. Then, the processing equipment. We think these are developing in stages. We’re being swamped with millions of dollars of bids right now, and the prospects look good for profitable work developing from here on out. The last six months have been pretty dismal. Of course, there is going to be some price cutting in the transition to better times from the yards that have hardly any work going on. It will be cutthroat for a while, but by the first of the year I think that we’ll start seeing some severe shortages of infrastructure, support facilities, and drilling rigs. In fact, I foresee drilling rigs becoming so short in supply that we’ll probably have to build another 400 or 500 in the next 10 years to supplement and/or replace the 630 that are pretty aged and still working in the world market. I also see the need for supply boats to be built. In addition, I visualize another 42 million barrels of oil that will have to be produced in the next 10 years to supplement the 77 million being produced today. We are going to have severe natural gas shortages starting this winter. We are using about 53 billion cubic feet of gas a day right now and I see that increasing substantially as it becomes available. That will mean pipelines from Canada in order to bring down another five or six trillion cubic feet a year, on top of the 22 trillion cubic feet we’re using in the US. Also, the electrical grid — the power base — we’re developing in the country is going to be designed to use natural gas. That is going to create a tremendous demand for natural gas. Natural gas is at $5 a thousand cubic feet, and I see that increasing to $8-$10 in the spot market this winter. The factors are all very attractive. Everybody is blaming the oil companies, asking why they have let oil prices get so high. Well, the oil companies didn’t have anything to do with the pricing of oil and gas. Two years ago, OPEC flooded the market and shut down North American drilling. Oil prices dropped to $8-$10 a barrel but Saudi Arabia alone was losing $50 billion a year. So, they started cutting back on the oil supply. Of course, prices then zoomed up to $35 a barrel plus, and the oil companies sat back and their profits doubled, tripled and quadrupled just by doing nothing and by not spending any money. I think the public pressure is going to be so great it will crowd the Congress, and the Congress is going to threaten a windfall profit tax. Then, I see activity picking up substantially. My greatest concern is that we won’t have the people; we lost 1 million people in this industry since 1982. We’re down to 600,000 people and, in turn, our experience and expertise have diminished tremendously. That’s going to be the number one problem — finding the skilled workforce to support and supplement the needs of the major oil companies.

TWST: What accounted for that sharp decrease in the workforce?

Mr. Berard: A lot of mergers, acquisitions, and the consolidation of the industry to cut costs created this. In these downturns, when companies let people go those people feel betrayed. So, they go on to other fields of endeavor and they’re not coming back. Then, our schools are not producing the quality of students we want. For example, here in Louisiana, about half of our students don’t finish high school and of those that finish high school 30% go to college and of those 30%, 12% finish college. I’m a workforce commissioner, and am determined to give what little time I can to the Governor to try to help solve these problems. We finally came up with a solution — we’re going to spend $630 million upgrading and training people. But, that’s a long-term process. We have made it clear to all of the training centers that either they produce what business needs, or we’re going to cut your budget until you go out of business. We’ve gotten their attention. So it’s going to be a transitional period and not unique to the Gulf Coast region. This issue is pervasive throughout the country. Unemployment is at 3.5%-4%.

TWST: Do you see more domestic or smaller domestic oil and gas exploration companies looking for untapped markets within the United States, as opposed to going abroad?

Mr. Berard: Well, it has been so penalizing because of the attitude against the oil companies. The majors have consolidated and I think that their focus on the international market is going to increase, with the exception of the Gulf of Mexico. We’re drilling in up to 10,000 feet of water now, and producing in 4,000 or 5,000 feet of water. They’ll spend $1 billion putting in a structure, but the price of oil will drop to $4.50 and $5 a barrel because they produce so much — 20,000-30,000 bbls. a day. On land, in this past downturn, taking Texas for example, 20,000 wells that were averaging 10-12 barrels a day were shut down. Once they cemented these locations, they’re not going back in. That’s approximately one million barrels off the market. America was producing 10 million barrels of oil a day, and now it’s down to about 5.7. Russia used to produce 12.3, and is down to about 6.5 million barrels a day. Look at the OPEC nations, which account for two-thirds of oil reserves. I’d say that in the last several years — since 1991 — most of those nations have spent their treasure on building military hardware and buying military hardware. So, the wells in Saudi Arabia that were drilled by the American oil companies and then nationalized in the 1920s and 1930s, mean additional drilling needs to be done, but they don’t have the money. The major American oil companies are going to go in there and do the drilling for them. West Africa is going to be the second hottest spot on earth with regard to offshore drilling in 3,000-4,000 feet of water. All of the major oil companies are there, and the future is there. In the Caspian Sea, reserves are probably comparable to the 250 billion barrels in Saudi Arabia. It’ll take years, and the turmoil in the Caspian Sea involves a small channel of access to the outside, so it’s going to require specialized equipment.

TWST: Would you characterize the turmoil in the Caspian Sea area as political?

Mr. Berard: Yes, it is very political. Russia is in turmoil because it’s bankrupt. Iran, Turkey and all of the former Russian nations are at each other’s throats. It’s a quagmire. They spill more oil than they produce. All of their drilling rigs and pipelines are aged and leaking. I was there and I’ll tell you, it is pitiful. The environment there is totally destroyed, and it’s only going to get worse. Russia doesn’t have the money, not even for its military since Ronald Reagan kind of broke the country’s back when he was President.

TWST: Do they have enough money to clean up the environment over there?

Mr. Berard: No, they really don’t. All of their drilling technology is antiquated because it was built 30 to 40 years ago. It takes 40 days just to set up a land rig there, a task we accomplish in a day or a day and a half.

TWST: If the drilling rigs are becoming old here, how old they are over there?

Mr. Berard: Most of those drilling rigs are 40 to 50 years old. The situation in China is just as bad. There are one billion people in China. They are using four million or five million barrels of oil a day compared to the US, which is using 22 million barrels of oil a day, with a population of 300 million people. In this country, we average about 40 barrels per person per year. Some of the Asian countries are lucky to get one barrel per person per year.

TWST: It’s truly a depressed area.

Mr. Berard: It’s the standard of living. I’ve been in these countries and worked in some and when these people see the standard of living in the US, they want to improve theirs. When they do, we’re going to need to increase oil production another 42 million barrels a day over the next 10 years. We’re going to be dependent on oil, gas, and coal for the next 30 to 40 years. There will not be solar, hydrogen or electric cars. All of this will transition over the next 10 years and through the next 40 years. Even 40 years from now, if we quit drilling for oil, we’ll still be drilling in the deep reaches of our oceans and in the mantel of the earth to produce super heated steam for turbine produced power. Our entire power grid is being designed now to use natural gas, and we’re going to have to increase the heck out of natural gas. I don’’t know if we have the infrastructure or the support services in place to meet these growing demands, not only domestically, but worldwide, as well.

TWST: Will we be seeing solar energy only when the oil and the gas supply has been tapped bone dry?

Mr. Berard: Not exactly. Oil and gas are still the cheapest and, of course, we are using a billion tons of coal a year to produce 53% of the electricity in this country and it’s 50% more pollutant. So, the move is to phase the coal out, and that will put more pressure on natural gas. The move is to reduce the amount of oil being using and that will put more pressure on natural gas. Natural gas is the clean fuel of the future and everyone is drilling for natural gas. If they hit oil, fine. The major problem is that we’re importing 58% to 59% of our oil now, which equates to 9.5 million barrels of oil a day. Even if we had the tanker … and with the new regulation requiring double hull tankers, there are not enough tankers to haul more oil to America. We’ve cut our domestic production almost in half. Even if we can transport the oil here, in the last eight years we’ve shut down 36 of our oil processing refineries. We haven’t built one in a quarter of a century. The existing refinery utilization is 97%. If we brought more oil in, we still couldn’t process it. There again, we are attacking the refineries. Louisiana has a dozen of them. They want an oil process tax added on to the processing. Politicians are trying to gouge the oil and gas industry every possible way. It is a $65 billion economic engine for Louisiana alone. It creates 300,000 jobs directly or indirectly. It has a payroll of $2.7 billion. They are attacking the hand that is feeding this state. Louisiana used to provide $1.7 billion in tax revenue, and now that is down to $630 million because of the constant attack on the oil and gas industry. The industry is moving corporate offices out of Louisiana into Houston. Houston is going to become a mega-center for the oil industry. It has been, but will become more pronounced. Of course, then we have the Tension Leg Platforms and all of the different technology that is developing. We have floaters that we are going to need in deep water to gather this oil. We can’t pipe it back to shore because the infrastructure is not there. In other words, we have two-thirds of the world’s platforms in the Gulf of Mexico — over 4,000. Every time one of those fields plays out, MMS (Mineral Management Services) requires their removal. As a result, we are removing 100 to 125 platforms a year currently and it has been a tremendous boost for the fishing industry. We’ve discovered 150 new species of fish. Fishing increased five-fold because it becomes a place for fish and barnacles, smaller fish and larger fish, to live off of each other. It’s a major plus for the fishing industry, but removing these structures also is a minus. If they are designed for a 100-year storm they can be brought in and refurbished. Right now, UNIFAB has 50 acres of used structures. That saves about 35% in cost versus building a new one and you are out there six months sooner and the revenues are coming in. So, refurbishment of all of those platforms is becoming big business and UNIFAB is one of the best in the business. We have a decade of experience in refurbishing offshore platforms.

TWST: Do you have a lot of competitors drilling for oil and gas in that particular region?

Mr. Berard: Yes, when the markets are tight we’re all competitors. However, a lot of the smaller fabricators have gone out of business. Transcoastal is the most recent. McDermott has a lot of problems. They are facing tremendous losses in earnings. And, Babcox-Wilcox is in Chapter 11. The Brown Roots mostly got out of the construction business. So, the newcomers are coming in. They are smaller, more aggressive and better prepared. Nevertheless, we are going to have a tremendous shortfall of services to support the growth that I envision. The turnaround has taken place and the tremendous growth we are going to witness in the next few years is beginning.

TWST: What do you see as the rate of gain in sales and earnings for UNIFAB over the next couple of years?

Mr. Berard: I would say that UNIFAB, assuming $100 million right now in its downturn. I would think that the money we spent, the capital investments we’ve made could easily double that over the next year and a half. Perhaps, within two years, it could be up to $250 million; within the next five years, I don’t see why we couldn’t see that in excess of $500 to $600 million a year of revenues with good profits.

TWST: You mentioned earlier that some of the major companies are moving in to places like Africa. Didn’t you also mention that you have a presence in Nigeria?

Mr. Berard: Yes. We have a small yard that we’ve just opened up in Nigeria. It gives us a presence there, but they don’t have the expertise yet. They don’t have the workforce in place that can build these offshore platforms. In fact, for the last 10 years, 70% of our work came from West Africa. We build these platforms for the major oil companies and the major installation contractors. Then we add $1 million shipping costs and still can do it cheaper and higher quality. All of the process equipment represents years of expertise in the Gulf Coast. I would think now that a lot of the installation contractors are going to be looking locally and developing the workforce over there because of government mandates and requirements as we get a foothold in the region. We will do some of the light work to start as we train the workforce in Nigeria, but the major work will have to come here to be done until we can build up a workforce there in the next five to 10 years.

TWST: What do you consider the greatest opportunity for UNIFAB International to be right now?

Mr. Berard: At this point, our greatest opportunity is in training the workforce to fill the jobs that are going to be created by increased drilling activities. Our opportunities are probably better structured than most companies. As I mentioned earlier, we are broadly-based, involved in every facet of the needs of the oil and gas industry. We can go from drilling rigs to platforms, to process equipment with state-of-the-art technology. We recently open a new division, UNIFAB Environmental, and are going to be operating in Vietnam, in Korea and in all of these countries to build sewage processes to process water that has been contaminating all of these nations. We already have made some inroads and sold some units. They could be built here out of steel and shipped to these countries and all the countries have to do is to put them in place and start using them. In most of these countries, they build sewage systems out of concrete and steel. We can provide the same systems in modularized units.

TWST: It’s always amazing to hear that US companies are being allowed to enter places like Vietnam.

Mr. Berard: There is no choice. We have the expertise and technology. Of course, you are going to see some changes in Iraq and Iran through the United Nations in the future. We can do it. The quantity and the quality can be produced much more cheaply than they can do it in the North Sea or in any of these countries. Now, we are not going to build the big floaters or anything like that. That will be done in other countries, because they can do it cheaper and they have the shipyards. When those big tankers are built and brought here for outfitting they will get the best bargain by coming to our facility in Lake Charles with 40 feet of water and we can modulize in advance of these vessels’ arrival and install the equipment on them.

TWST: Would you say that your drilling is equally divided between oil and gas exploration?

Mr. Berard: Right now, the drilling focus is for natural gas. If oil is found, that’s fine, but everyone is drilling for gas. Even with that much emphasis on gas drilling, I still think that we are going to fall short, because everyone wants natural gas. It’s the cleanest, cheapest fuel to use. We are going to see some fuel oil problems on the East Coast. We are going to see gasoline shortages and problems because we don’t have the refinery capacity any longer. There is no encouragement to build more refineries and I think the major oil companies are going to focus on the international market where they are not criticized and penalized in building new refineries. I don’t think they are even going to look at the US unless there is a change of attitude.

TWST: Do you think there is too much government regulation with regard to refineries?

Mr. Berard: Very definitely, there is too much regulation. In this country, companies are at a decided disadvantage because other countries do not place these burdens on them. So, they can produce, refine and do all of these great things in these other countries without prohibitive taxing and environmental restraints that are placed on American companies. Out of necessity, I would think that UNIFAB, within the next couple of years will explore those options and is already making overtures. We are looking at probably opening a facility in Mexico where there is more labor that can be trained. Mexico is only 600 miles across the Gulf, and so, we could expand our activities and expertise in a country like that. We are looking at Trinidad. BP, Amoco, British Gas and others — just hit tremendous finds — and we’ve looked at the possibility of opening there. I’ve worked in Trinidad before. I built some pipelines there when I was in the pipeline business. I’ve worked in most of these countries and I believe that UNIFAB has some of the best workers in the world.

TWST: How would you characterize your exploration or geological team? Are you enthusiastic about that?

Mr. Berard: We are not in that business at all. There are companies that specialize in that arena. However, even the specialized companies that would be doing the 3-D and 4-D seismic are smaller companies, now that there is new technology that implements satellite usage for location and shoots these structures. Technology is moving so rapidly that obsolescence can, at times, develop in two or three years. You can see it in the high-tech industry. I would say that 80% of the current high-tech companies, with these price/earning ratios of 100 to 150 to 200, would be out of business in about five years.

TWST: As CEO, where would you say that you spend most of your time within the UNIFAB company?

Mr. Berard: I spend most of my time trying to get all of our companies to be cross-supportive. In other words, if one yard has extra equipment, let’s move it over by barge and/or by truck. We shift people around by working with all of the presidents of these companies to see the big picture. For example, if one company has a two-week job and another lets a dozen people go, and another can lend a couple of people, let’s work together. We are determined to coordinate all of our activities to utilize all of our assets as efficiently as possible to keep cost down. Certainly, we are not through looking at the possibility of additional acquisitions. Not anything in left field or right field, but something that would enhance our ability to broaden our base in the heavy marine fabrication business. There are some small companies that are well-managed, profitable companies. Management may be agreeable to “light out” or wants to be merged or to become part of a public company. Well, that management takes the opportunity and we do, too. Over the last couple of years during the downturn, we broadened our base with six companies. If there hadn’t been a downturn, I doubt very seriously if some of these companies would have been available.

TWST: Did you say that PIM was your most recent acquisition?

Mr. Berard: No, it was one of our original acquisitions. That was in Lake Charles, where our deepwater facility is located and it is being visited by most of the major oil companies now. We have four platforms, used platforms, for refurbishment and possibly a couple of drilling rigs coming within the next 30 days. We just finished refurbishing a jack-up rig. Well, these companies are beginning to recognize the availability, the centralization, of our Lake Charles yard — and, the easy access in and out with a 400-foot wide, 40-foot deep channel, from the yard to the Gulf of Mexico.

TWST: What should long-term investors focus on when reading your financial reports right now?

Mr. Berard: They ought to look at the fact that during this downturn, UNIFAB stayed close to book value because we only had about 6 million shares and there was no float out there to attract analysts to us. They need to look at the fact that we have positioned UNIFAB for tremendous growth in the future. They ought to look at the company from here on. UNIFAB is going to be one of the leaders in the industry, because we have proprietary technology — in the process equipment, in the drilling rigs, in special drilling rigs for special parts of the world — that is unique and patented worldwide. We get a lot of overtures for this technology. We have a young, aggressive company. Most of our Presidents are in the 50-year-old age range with 25, 30 years of experience. Of course, I am the old goat, but with 50 years of experience I can still outrun and out jump most of them.

TWST: Are you a world-class traveler?

Mr. Berard: I’ve been all over the world. In fact, I was in New York about a month ago giving a presentation about UNIFAB and it was well received. I do that as often as I can. I give speeches about the industry as often as I can and tell people that our national and economic security is in jeopardy and we should not be playing games. I am deeply concerned. I think we need someone with some knowledge about our oil and gas as our next President and not one that wants to shut down the fossil fuel industry at every turn. Our military is down. It’s been cut about one-half of what it used to be and we don’t even have the fuel to train our military. We need to put a focus on America’s energy needs, which are tremendous. We are going to have shortfalls. We don’t have the refinery capacities. I would say we are really in a box right now.

TWST: What do you think about moving into wildlife preserves?

Mr. Berard: I think we need to drill in Alaska. We built a pipeline there many years ago and it was producing two million barrels of oil per day and now is down to a million. There are tremendous gas reserves there. I think we need to go in there and develop those reserves and build a gas pipeline to the United States. If you are going to be dependent on natural gas, you’ve got to have a source. Also, we ought to be working with Mexico. Mexico used to sell us gas back in the 1970s and now they are using the gas internally and exporting their oil. It is a revenue base for that country. I think we should explore the possibility of getting the gas there. Particularly, there is Canada. Canada has tremendous reserves. It is going to cost hundreds of millions to build pipelines and to get that gas down here. In the next decade the most we probably could get is 5 trillion or 6 trillion cubic feet to supplement and/or increase the 22 trillion cubic feet we are now using annually in the United States. Gas is just going to grow by leaps and bounds, and so a tremendous amount of drilling is needed. Yes, in Alaska we’ve proven that we can drill in these environmentally sensitive areas without creating any problem. In fact, most of the time after they built that oil pipeline the caribou herd increased.

TWST: What do you think about your current stock price?

Mr. Berard: It is about $11 and I think that is a bargain, a real bargain, when we are just in a turnaround mode right now. We are flying below the radar. That’s one of the reasons, but as the industry starts perking up again and UNIFAB becomes more recognized, I can tell you right now a lot of the major oil companies are coming back. Over the last few weeks, there has been talk about alliances where they just pick UNIFAB and we talk about work without having necessarily to go out for bids on a cost-plus basis. I believe that the industry is starting to recognize that there is going to be a limited amount of services now that they have decided, either by coercion or voluntarily, to start drilling and spending some money. In a few months when oil does $35, why spend your money when you are tripling and quadrupling profits without spending your money?

TWST: Thank you. (JF)

DAILEY J. BERARD
 Founder, Chairman, President & CEO
 UNIFAB International, Inc.
 5007 Port Road
 P.O. Box 11308
 New Iberia, LA 70562
 (337) 367-8291
 (800) 743-5978
 (337) 373-5627 - FAX
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