Oil Workers Stay Put in a Downturn

The recent oil boom spurred the largest expansion in offshore drilling since the 1970s. Diamond Offshore Drilling (DO) particularly cashed in on the huge demand for its 45 deepwater oil rigs that it contracts to oil companies such as ExxonMobil (XOM), Chevron (CVX) and Conoco-Phillips (COP). During the past three years, Diamond's average annual growth rate was 41%, and in 2008 it increased profits by 55%,to $1.3 billion. But when the economy took a nosedive and oil prices plummeted last year, drilling activity saw a precipitous drop, too. While Diamond is still growing, the pace has slowed: On Apr. 23 the Houston company announced a 13% revenue increase in the first quarter of 2009. In 2008, revenue had grown by nearly 30% compared to the same period the year before.

But the downturn has helped management with one of its biggest headaches during the rapid growth: employee turnover. When oil prices were high a year ago, Diamond and rivals Transocean (RIG) and Noble (NE) couldn't build new rigs quickly enough to meet demand. There were many opportunities for low-level rig workers, known as "roustabouts" and "roughnecks," to work at other drill contracting companies and for senior management to find positions at oil companies. People jumped ship when another company dangled a wage increase. At its peak, employee turnover for the industry was 30% to 35%, says FBR Capital Markets (FBCM) analyst Robert Mackenzie. "When you're attaching bolts the size of your head, it is really backbreaking work, and there was huge demand for people who were strong enough," says investor Bob Auer of Auer Growth Fund, which holds Diamond Offshore and Transocean in its portfolio.

Even with turnover rates half as high as some rivals, Diamond still lost nearly 15% of its people each year. Now, CEO Larry Dickerson is relieved to see that his 5,700 workers are largely staying put. "Employees are much more concerned with making sure their employer will be around in a few years," he says. But rather than exploit such stability to keep labor costs in check, Dickerson is trying to use the current environment to solidify people's loyalty to his $3.5 billion-a-year company. By protecting benefits, bolstering safety programs, and making it easier for workers to stay connected to their families, Dickerson hopes to improve retention rates once the economy turns up.

Safety First

The life of an oil rig worker is unique in several respects. Workers typically spend two weeks on a rig per stint and then are helicoptered back to land for the same period off. With many rigs located hundreds of miles from the shore, it can be an isolating experience that some aren't emotionally equipped to handle. (Between 60 and 150 people work on a rig depending on the size.) Combine those conditions with the need for a high level of fitness to handle the equipment, and even low-level workers can command $40,000 a year.

Dickerson, who became CEO in May 2008, has long understood the need to keep workers happy. "Morale plays a huge role in the performance of the vessel," he says, "so we make sure the creature comforts are taken care of." He employs staff to make rig workers' beds, operate the rig fitness centers, and serve up to four hot meals and four snacks per day. Diamond also hosts softball tournaments for workers and their families and individual rigs organize picnics during their downtime on land.

To be sure, many of these moves enhance worker productivity and safety. Tired or ill-informed employees are at risk of mashing fingers and limbs on machinery. By giving out safety awards—another recent development—Diamond hopes not only to increase morale but also to reduce injuries. As Dickerson increasingly moves Diamond to being a global player with rigs in countries like Malaysia and Brazil from a predominantly U.S. one with operations centered around the Gulf of Mexico, he hopes better working conditions will accelerate growth.

Still some analysts such as Mackenzie predict turnover will increase again when the economy rebounds. "In this industry, there is a culture where if you can make a couple bucks more, you hop ship to the next company." The slowdown in the oil sector may end ahead of a broader economic recovery. Global drilling spending will increase 32% by 2013, according to research firm Douglas-Westwood and forecasting company Energyfiles. Dickerson hopes his team will be strong enough and motivated enough to help Diamond grab a larger share of that pie.

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