The most important asset - Yourself

From the Business Times February, 2013

Your most important asset is - yourself

Unlike stocks and bonds, you have full control over your human capital

WHAT is probably your most important asset? Stocks? Bonds? Real estate? Collectibles? None of the above. It is human capital. Although most of the focus in wealth planning is on financial assets, human capital is the one thing you can bring to the table that can have the most impact on your future. Yet few advisers stop to measure it fully and discuss its impact on your prosperity.

You have a surprising degree of control over your human capital, unlike the financial markets. You can switch jobs, obtain graduate degrees or simply work more as an independent contractor or partner in a professional firm. In contrast, you have no control over what stocks, bonds, commodities, real estate and other assets return every year.

So consider human capital a measurable return on investment - in yourself.

The stodgy economist's definition of human capital is the net present value of lifetime earnings. This is what you will earn based on the skills, experience and talent you contribute to the labour market. For some, this is a fixed quantity, but in a dynamic world where people are increasingly shifting careers, working longer or pursuing "encore" careers, human capital is a moving target.

Yet estimating human capital is a bit like trying to guess your life expectancy. Life throws us a lot of curves and income gauges look easy to calculate as they emerge from a software programme. Nevertheless, you need to do some projections of lifetime earnings, and potential changes in your income stream, to make a realistic, flexible and holistic financial plan.

Zvi Bodie, a professor of finance at Boston University and co-author of Risk Less and Prosper (Wiley, 2012), says it is essential to know your human capital factor because it ties into how much risk you can take in your financial portfolio. Prof Bodie has been a pioneer in applying economic life-cycle theory to human capital decisions.

Some, with a fairly secure income over their career - such as college professors - may take more risk in their portfolios, while others whose income is linked to cyclical industries may not. You can characterise your human capital like a stable bond or an insecure stock. This is one of the first steps in linking your human capital to how much risk you may take in your portfolio.

"I see myself, for example, as a convertible bond," Prof Bodie said. "I'm protected by tenure at a solid university and have the potential to do extra things for income. I have a lot more capacity to take risk in my portfolio than I choose to use. I'm risk-averse, don't like to gamble and don't get a kick out of winning. I hate to lose."

Noting that "human capital is not a major asset for only a tiny fraction of the population", Prof

Bodie said that lifetime earnings and portfolio management should be reframed as a way of insuring a standard of living and not a focus on obtaining the highest returns.

Figuring human capital into a prudent financial plan requires an attention to detail that most financial advisers may not be able to handle. Because most advisers are focused on managing money or picking investments, they may not be able to do the right calculations that are flexible enough to accommodate changes in income.

Paula Hogan, a fee-only certified financial planner based in Milwaukee, has been employing human capital and the life-cycle theory that underpins it into her business model for years. Like most planners, she carefully examines cash flow, expenses, income and her client's portfolio.

"A key insight of life-cycle theory," Ms Hogan said, "is that the consideration of human capital comes first and then portfolio management comes after that: financial capital is tailored to the human capital, not vice versa." Ms Hogan also steps into the realm of "life" planning that merges human capital with various goals and changes in a person's journey. This raises a set of questions that go beyond numbers. "What do you care about?" Ms Hogan said she asks clients. "Do you have a vision of where you want to be?"

Career counselling

If they want to change, the questions become more focused on transition. "How can we make a bridge? What about health insurance? Will you need a new family budget? Do you have family reserves (savings)? Is your spouse on board?"

Sometimes the transitions are modest, as for an executive at the top of his profession whom she counselled. He wanted to "not go at full tilt" and spend more time doing other things. Other, more radical moves, such as a career change, will require more support. Ms Hogan works with career coaches and counsellors such as Jane Schroeder of Brookfield, Wisconsin to manage the vocational piece.

As a master career counsellor and board-certified coach with a background in educational psychology, Ms Schroeder applies standard assessment tools such as the Myers-Briggs personality test and talks with clients on future direction. She delves into their core strengths, competencies, emotional intelligence and "brainstorms on possibilities".

"What allows you to engage your human capital at the highest level?" she asks clients. "When were you at your best? What was happening? What was energising?"

By re-engaging clients with the force that drives their ability to create, manage or earn money in a fulfilling way, Ms Schroeder eases the transition that some need to make.

It is one thing to know if you need to make a change, but is that possible, given your financial situation? Will you have enough cash reserves to see you through a transition? Will a spouse or partner support your household while you make some changes or re-educate yourself?

Before you even make the decision to redeploy your human capital, you will need to run some numbers to see if it is possible. Online planning programmes such as ES Planner (esplanner.com) can give you some general ideas on what is possible given changing income and cash flow.

While these questions may be difficult at first, they may help you forge a satisfying new path. But you will need to take your time and do some detailed planning that may involve a paradigm change. Your personal capital reserve and future earnings should drive your ability to make a change and not your portfolio return. That is a big leap for most, but a rewarding one if you are able to navigate it.

The 61st B-Class jackup ordered since 2000

April 2013, KeppelFels to build a fourth jack-up rig based on its KFELS B-Class design but with bigfoot (bigger spudcan size).

The rig, Ensco 110, is scheduled for delivery in the first quarter of 2015 and will be constructed under a fixed-price contract. The cost, which includes commissioning, systems integration testing and project management, has been valued at about US$225 million according to website info. The company already has three active rigs based on the KFELS B Class Bigfoot design – Ensco 106, Ensco 107 and Ensco 108. The rig will be capable of working at water depths of up to 400 feet and drilling to 30,000 feet deep. It will have a nominal variable deck load of 7500 kips and a cantilever load of 2500 kips.

Upon completion in 2015, Ensco 110 will be the 16th newbuild project delivered to Ensco by Keppel.

The first B-class jackup was for Chiles Offshore signed in year 2000. It was after much engineering time spent, a small team from here together with OTD supporting ( Offshore shallow water research and designing arm ) met with Chiles Offshore in AMFELS exactly 13 years ago around April Year 2000. Some of us were at AMFELS finalizing some technical issues on the rig design with Chiles Offshore VP of Engineering, Mr Gabe Padilla. He is very well-versed with machinery and piping systems installed on jackup rigs and good in sketching on the whiteboard detail engineering where he could discuss any kind of information right at his finger tips.

The first KFELS MOD V "B" was Chiles Discovery (now renamed ENSCO 104) built and delivered by Keppel FELS in Singapore in year 2002, and currently deployed in the Bayu-Undan field in Timor Sea for Phillips Petroleum Company.

In year 2000, the newbuild jackup market is the only sector of the drilling industry where new contracts have been signed. In the last few months of that yeaor, Chile7s Offshore, Rowan, and Maersk signed contracts to build three new high-specification jackups:

•The Chiles vessel will be a KFELS MOD V "B" design, cantilevered jackup. Th7e rig will be an "ultra-premium" deepwater jackup built with a leg length of 475 ft, with an option to extend it to 545 ft.

•Rowan is building the Gorilla VIII, an enhanced version of the company's Super Gorilla Class rigs, called the Super Gorilla XL. The Gorilla VIII will be outfitted with 708 ft of leg, 134 ft more than the Super Gorillas, and have 30% larger spud cans for working in water depths up to 400 ft, making it the jackup with the deepest water capability.

•Maersk has contracted for what it calls "the world's largest and most advanced harsh environment jack-up." The rig will have 205 meters of leg for operation in water depths up to 150 meters in harsh environment conditions. It will also have double the variable load capacity and drilling envelope of traditional rigs.

ENSCO 105 is the second MOD V "B" new generation deep-well drilling rig that has been completed in AMFELS few months after CHiles Discovery (ENSCO104). The total cost of construction and outfitting for the ENSCO 105 was in excess of US$100 million (S$175m), of which work performed by AMFELS formed a major portion.

At the rig's christening ceremony in AMFELS, Choo Chiau Beng, Chairman and CEO of Keppel Offshore & Marine said, "The design and construction of the two KFELS MOD V "B" class jack-ups is a significant milestone for Keppel as we seek to deliver quality products and services to customers at competitive prices. "We are privileged to have participated in the growth and expansion of the fleet of ENSCO rigs in the last few years. We built ENSCO 101, an enhanced MOD V harsh environment jack-up in year 2000. This year alone, we delivered three jack-ups to the company, namely, ENSCO 102, ENSCO 104 and now ENSCO 105."

chiles discovery1.ppt ..

ENSCO 104.pdf ..

In May 2002 :

ENSCO International Incorporated and Chiles Offshore Inc. announced that they have signed a definitive merger agreement by which ENSCO will acquire Chiles. The Boards of both companies have approved the transaction. Under the terms of the merger agreement, Chiles' stockholders will receive 0.6575 shares of ENSCO common stock, plus cash of $5.25, for each share of Chiles' common stock. Total value of the transaction is approximately $578 million based on ENSCO's closing price as of May 14, 2002. After giving effect to the transaction and including the Chiles' rig currently under construction, the combined company will have a fleet of 56 offshore drilling rigs, in addition to ENSCO's fleet of 28 Gulf of Mexico oilfield support vessels. The combined fleet will include 43 premium jackup rigs, with 29 rigs, or two thirds of the fleet, having been built or rebuilt since 1995. ENSCO's Chairman and CEO, explained the strategic reasons for the transaction. "The acquisition of Chiles will increase ENSCO's exposure to the premium jackup market through the addition of the newest and one of the most capable fleets in the industry. We believe that this is a prudent way for ENSCO to grow, adding to the high-end of our jackup fleet, without impacting industry supply, and without increasing our financial leverage. We expect this transaction to be accretive to our shareholders from day one, both in terms of earnings and cash flow. We anticipate that ENSCO's long-term debt to total capitalization ratio will remain at 24 percent after giving effect to the transaction. "Chiles and ENSCO have similar operating philosophies

What some of the Rig contractors/operators discussed about drilling rigs and outlook back in 2000  (some of the discussions and extracts may not be concurring or accurate anymore with the current trend and what was discussed during that period ) :

The general rule of thumb in the industry is that a drilling unit has a natural life of about 25 years. According to statistics from Bassoe Offshore, almost 40 units of the jackup fleet has reached this age limit and by definition should be retired. But some disagree with this limit.

"The offshore industry is relatively young, and to a certain degree, rules are being made up as we go along," said Bassoe Offshore Consultants Ltd. "Until fairly recently, drilling contractors used the criteria of shipowners when it came to deciding on the useful lives of their rigs. This dictated that it was uneconomic to keep a ship, and hence a rig, past its 20th or 25th year, when particularly onerous and expensive special surveys are due."

"However, as the first modern offshore drilling rigs were not delivered until the early 1970s, it was not until the 1990s that they reached this anniversary and owners were confronted with requirements. While older, redundant designs tended to be scrapped, it became apparent to contractors that, provided the basic design of the rig was acceptable to operators, there was no need to retire a rig at 20 years. This is because the offshore drilling procedures have not changed, so the original hulls, provided they are in good condition and adaptable to the more sophisticated (although essentially the same) machinery that is now in use, remain perfectly acceptable"
These rigs are being extended to 25-30 years, and some cases, beyond that. For standard wells that are not technically challenging, the older rigs work fine. They are not as efficient, but they work fine," concurred Bill Chiles, then President of Chiles Offshore.

Rowan, added, "Jackup rigs that were built prior to 1970 are so obsolete that no one will put any money into trying to upgrade them. Prior to that time, there was no class for jackup rigs. Then the US Lands Act Amendment came in and rigs built prior to then had a number of grandfather provisions. If you look at rigs built from 1978 on, most of them are of sufficient value that people would continue to do upgrades."

Rig design :

While age is an issue, the real factor limiting the usefulness of a jackup is design. "If a rig is properly designed and properly maintained, it has an infinite life," said Bob Rose, President of Global Marine. "Theoretically, if a design is competitive and you've maintained it, it can last forever. The industry used to think that they all had a 20-year life. Now we know that they last a lot longer than 20 years," he added. - Santa Fe's Galaxy III is one of the new fleet of jackups.

So the question now becomes: which designs are capable of being extended for longer and more useful life?

The limiting factors are chiefly variable loading and integrity of the structure. Most contractors said that, of the designs in operation, the independent leg rigs with a rack and pinion jacking system were the most suitable for upgrade. These include the LeTourneau designs, the Friede & Goldman L-780, and the Livingston 111. At the same time, most said that a majority of the mat jackups could not be economically upgraded.

Pride said, "Mat jackups are suitable for soft bottoms and are not suitable for every type of seabed environment. For example, the units do not have the capability of being upgrading to harsh environment jackups, but they can drill wells just as well as any other jackup, once on location."

Maintenance, inspection :

During inspections, contractors can determine the future of a drilling unit. Every year, each rig goes through an annual classification society test. Every five years, each undergoes mandatory testing to maintain class. Additionally, on five year schedules, the rigs undergo periodic surveys to check structural integrity.

When rigs do not meet the requirements of these tests, then retirement becomes a real option. The most stringent of the regulatory areas is the North Sea, where jackups must meet harsh environmental criteria. While this could result in retirement, some companies just move the rigs to another areas of the world. If a rig is in class, then it is by definition capable of operating.

Upgrading units  :

The overall consensus among drilling contractors is to upgrade rather than purchase a new rig. The decision comes down to a return on capital deployed. If a company can make the necessary return on capital based on the cost of the construction program, it will be done. The average upgrade costs for a jackup vary, depending on construction. The lowest average is about $3 million, and $40 million on the high side. This compares to $100 million average for new construction. If the resulting productivity is the same, then the numbers favor the upgrade.

There are limits on what can be done to jackups. The most common upgrades involve adding leg, extending cantilevers, adding jetting systems to assist in pulling legs, adding horsepower, adding additional pumping capacity to help pre-load faster, and adding owner furnished equipment, which in itself is interchangeable.

The most upgradeable of the designs has proven to be the LeTourneau designs, post 1978. This is the only design that offers the advantage of being able to add leg. Rowan said that the majority of the rigs came with 410 ft of leg and that they now know the units can by upgraded to 477 ft. This involves strapping the leg to increase the strength of the leg and adding additional gear units to gain variable load.

Three recent upgrades were executed by Noble Drilling. The company upgraded the Bill Jennings, Leonard Jones, and Eddie Paul rigs, all 300 ft independent leg slot rigs. The company performed the upgrade because they did not have the cantilever reach necessary for development projects. The upgrades included adding leg lengths to 500 ft on each leg and reinforcing the legs so that the units could operate in water depths greater than 350 ft. In addition, the company added 65 ft and 70 ft reach cantilevers on the rigs. The company said that the upgrade made them more desirable, supported by the fact that since the upgrades, the rigs have not been off contract.

"If they can't charge enough money for the rig to justify its ownership then they scrap it, and I think you will see that, if you look at some of the rigs that are cold stacked in the Gulf of Mexico. Some will face multi-million dollar refurbishment plans and the owners will not do it,"  said Rowan.

"The niche market we are looking for is the deeper water locations, those that require extended reach cantilever, or wells that are technically very challenging - deep, high temperature, high angle," Chiles said.

"If someone is drilling an exploratory well and they don't need this higher capability, we run head-to-head with those rigs. For development drilling over a platform, we have an edge. And, if the well is a difficult well where the customer needs to run multiple casing strings, the wellhead design on a floater limits the number of contingent casing strings that can be designed at the wellbore."

Rowan added in support of new Gorillas: "What helps us is that virtually anyone drilling a subsalt or high temperature well will want to have a bottom supported unit, or if they are going to be looking at well problems." All three rigs are being built on spec, without a confirmed operator contract.

Speculative business :

Most newbuild jackups have been fabricated without a firm contract. The reason for this, Rose (Global Marine) explains, is that it is difficult to get a long-term contract on a jackup. "Long-term contracts are the exception rather than the rule on a jackup. Jackups are going to have to get very, very tight before you get term contracts," he said.

Chiles, who has constructed two of these high-spec jackups, concurs. "It's the nature of the beast. There are just no long-term contracts available in the jackup world with exception of a few in foreign areas. Certainly in the Gulf of Mexico, the operators are reluctant to sign long-term contracts."

Rowan said that spec building will always continue in the jackup market. "I don't think you will ever see a long term contract on a jackup, for several reasons. The first is that very few companies have long-term programs for jackup drilling rigs, unlike ultra deepwater, where the large number of tracks ensure use of the unit for three to five years. The shelf in the Gulf of Mexico is about 85% independent operators now, and very few of these independents have more than four or five wells in front of them that they can commit to. So you just don't have the demand there with a single customer for a long period of time. And there are a lot more of us in the jackup business willing to build a jackup on spec."

Rowan does have a competitive advantage, however. The company owns Marathon LeTourneau, which owns the LeTourneau designs and the LeTourneau shipyard, where all of Rowan's rigs are built. This helps ease some of the finances of speculative building. In his defense, Palmer said, "That advantage didn't exist until 1995, and we have been building jackup rigs for 32 years." Global Marine, Noble, Pride, and Santa Fe representatives all said their companies would not build without a contract.

Below shows a listing of Keppel rigs built and to build. It could be seen from past and present that the trend of speculative rigs ordered without contracts is still high and seems like it will continue for some time probably till the shallow water drilling rig market starts to be saturated..... who knows when ?

keppel jackup rigs to-date.pdf ..