Buying a drilling rig — or any major piece of equipment — takes planning and an honest assessment of your business.
“You’ve got to ask the right questions of your business,” says Charles “Buddy” Sebastian, vice president and general manager of Sebastian and Sons Well Drilling based in Springport, Michigan. “How much work are you doing with that equipment?”
Sebastian speaks widely at industry events about job costs, company sustainability and the future of drilling companies. He’s played an active role in the drilling and water supply industry for decades, and currently serves as president of the Michigan Ground Water Association (MGWA).
The Driller spoke with Sebastian for our Drilling In-Site video and podcast series. (See video of part 1 and part 2, or listen to the podcast episodes part 1 and part 2.) Sebastian offers plenty of advice for getting companies ready for those big cap-ex situations before they arise. This is an edited summary of the talk.
Q. You spoke to The Driller for an April 2020 story about business sustainability. We quote you as saying, “You can’t just work for beer and pizza.” What did you mean?
A. That is a huge question — more than what you think. So it’s a term I use [to mean] that a lot of drilling companies — and we’re going to talk about the owner operator or even a smaller company, they’re so busy doing what they do best. They’re out drilling the well. They’re out talking to the customer. They’re repairing the job. They’re doing all those things and, come to the end of the year, they don’t step back and look at their costs. They’re not bad people. They’re probably great well drillers. They’re probably great service technicians. But, at the end of the year, they’re going, “Holy moly. I did all this work. I basically made a wage. You know, I paid myself. I paid my son or my helper, and I paid my secretary, but I have no money left.” That’s what I mean.
We really need to take a look at, before we even start the year or start the week or start the month, where are we at? What are you doing? Don’t price it on your competitor’s price. Price it at what you need to make money and sustain your business, because you might be paying completely different expenses than your competitor. They may be running under the radar, not doing proper DOT regulations, safety regulations. You don’t know those things and really you don’t have to worry about it. You need to worry about yourself and how you want to operate.
Q. Before we even get to talk about when the right time to replace a rig is, tell us a little more about business sustainability. As a business owner, what should I be doing, say, a year or two out when I know I might have a big equipment buy in the near future?
A. That’s kind of a loaded question, but I’ll answer it this way: Two years out, you’re too late. With the current requirements to purchase a drill rig, you’re talking 20, 30 and, in some cases 40% down. Mostly it’s 20 on an $800,000 drill rig. That’s a $160,000 right there that you need down, or more. If you’re wise, you’ll put more down.
Now let’s talk about that for a minute. Let’s take a business, where they’re at right now with a drill rig. Let’s say they own a drill rig. It’s old. They got it from dad or they got it for the previous owner. They have a tanker truck and they have a service truck and have all this, and none of it is new. I say you want to turn the older trucks like you turn old inventory. You might not be able to buy that 2021. But if you’re running a 2006 service truck, the next service truck, let’s go to a 2012 or 13. Then constantly upgrade them.
How you do that is you sit back and you say, “Okay, what’s it going to cost to maintain truck A, B, C, D, E, F based on last year’s expenses. If you’re fresh starting, we need to talk about a different scenario. You base your repairs in this year’s budget on last year’s, and then you add some to it. You have to add some to it, because you’re going to want to replace that vehicle. So you’re constantly maybe siphoning off some profits. If you’re not, we’ll talk about going over your cost. You have your cost straight first and then figure out your profit, what it’s going to take. You have to break out each one of those individual vehicles, whether it’s a drill rig or everything else, and say, “I need to replace this at this point, this at that point. Of course, there’s always the unseen repairs — the motor that goes, the transmission that goes, the rear end that goes. The bad thing is, the rear end went out this year. The good thing is, you’re going to put that in your expenses for next year. And if it doesn’t go, well then you do something else to that vehicle, or siphon [the funds] off to replace it. You can’t just run with cash in pocket. You’ll never figure out where you’re at. Unless you’re really lucky and hit the lottery, you’ll never replace that equipment.
Q. Now, onto the big decision. When can a contractor know it’s the right time to replace or upgrade a big moneymaker like a drill rig? Is there a magic formula involving work hours, maintenance costs and expected downtime? Describe your cost/benefit analysis.
A. I have a formula, but I don’t have a “formula.” To answer the question, I do it this way: Where are you located? How much business do you have? You have to look at it like that. Are you a 50-well-year company, a 110-well-a-year company, a 250-well-a-year company? And then how far out are you going? You got truck miles or do you have rig hours? Which is it? Or do you both? You want to look at all the factors and say, “Okay, based on everybody in the area — and myself — and this many wells, I can make a rig last nine, 15, 12 [years].” Amortize that out and say, “Okay, if I’m going to buy a rig today. It starts losing value, number one, today. Number two, it starts going down in value with every rod you turn. When am I going to have to replace that? Or did I wait too long to replace it based on my volume that I’ve had consistently?” If you waited too long, then you shorten that window.
I mean if you take an $800,000 drill rig and divide that out by, let’s say, 10 years. That’s 80,000 a year. You divide that out by 2080 hours, which is a 40-hour week — and we all know drillers work more, but we’re going factor this, and that’s $38.46 an hour you have got to put aside every day just to replace it in 10 years. Now, here’s the bad news: It’s not going to be $800,000 in 10 years. It’s going to be more. Now that’s to replace it. That’s not to put a tire on it, fuel it, tool it — none of those things. That’s just to replace it. If you’re going to operate that piece of equipment, you take that same formula and say, “Okay, it costs me …” You add all those tools in and you add all that replacement in. You take the maintenance from last year — even though it’s new, you take the maintenance from your old rig last year, and you put that in with this. Then you start saving for that new rig. Instead of replacing it in 10 [years], let’s hope your volume goes up. Maybe a competitor goes out you absorb them, or he decides to team up and you guys are one company. Now you’re doing, instead of a 140 you’re doing 390 wells a year. You’re going to wear it out more, if you can do that with one rig. Then, you say, “Okay now what’s it going to cost me? Am I going to have to replace it sooner?”
Each individual driller is going to be a little bit different, but … if they take the math and apply it on the business side like they do to the drilling side — figuring out how deep they are and how much casing and all those — they can really get pretty sharp. It only takes about a weekend, maybe two a year to set yourself where you’re at, and then go forward. Now, there are other factors that come into it: rising prices in insurance, rising prices in fuel and all that. But that’s easy to figure out as you go if you have your baseline. If you have your baseline of where you need to be, then you figure that out going forward.
Q. What mistakes do contractors make when taking on new equipment (and the recurring payments that go with it)?
A. It all goes back to what I’ve been saying for five years. You have got to figure out your costs. So I’m going to go into that more. Don’t just figure out what the pump and tank cost. Figure out what it costs you per man, per day, per hour, per foot — whatever it is. Don’t just do it for the guy. You have to roll all your overhead into that: light bill, secretary, phone bill, insurance. Amortize it out. Figure it out however you want: by the hour, by the day, by the minute, by the job, by the foot. However, you want to figure it out, figure it out. But you have to roll all that in there. You can’t say, “Well, my pump and tank sales will take care of the overhead.” Okay, will it? You know it will? Well, you had better figure it out, because what about all the unforeseen things?
I think the biggest mistake guys make is thinking that, well Brock’s charging $55. I’ll charge $65, so I’m making more money. But Brock might be losing money at $90 an hour, but he doesn’t know it because he hasn’t figured out his costs. You have to start with your costs and then add your profit to that. The rule of thumb used to be 30%. I’m here to tell you, in the drilling industry if you’re only making 30%, you bought yourself a job. You need to price your products from your costs over that at about 38 to 42% to really put some money aside. It’s no crime putting some money aside to buy that rig, buy that water truck. You’re actually doing your community a favor by running up and down the road with better equipment. It’s safer. It’s safer for your employees. You can sleep better knowing that it’s a newer piece of equipment running up and down the road, and you don’t have to worry about a panicked accident. You know, it’s bad enough with other drivers. You don’t need to be the cause.
Back to your question, I think the biggest mistake is, first you got to have a profitable business. I know guys that buy a drill rig and, at the end of that drill rig’s life, they have nothing. Literally, there’s not a bearing, bushing, tire, door, window, anything that doesn’t need to be replaced on that piece of equipment. Now, granted, they got their money’s worth out of it. But did they do themselves and their employees and the company justice? If that’s how they want to operate, I guess I can’t say anything bad about it. But if they want a sustainable business that is profitable, that is saleable, that is “retire-able,” they really need to look at the other side of their business in costs. You know, the cost of a pump and a tank have nothing to do with it. It’s the cost of that overhead. It’s huge. Huge.
The Full Interview
We interviewed Buddy Sebastian for episodes 22 and 23 of our Drilling In-Site series. In addition to these questions, our conversation covered leasing versus buying, new versus used, and other key aspects of big equipment buys. See the full conversation at www.thedriller.com/insite, or listen to the podcast version at www.thedriller.com/insite-podcast. Episodes also in Apple’s Podcast store. Search Drilling In-Site and tap Subscribe.
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