Nabors Industries passed another milestone on Friday, October 28, 2011, when the board of directors for the world's largest land drilling contractor announced a landmark change in the company's senior management. After 24 years, 81-year old Eugene M. Isenberg relinquished control, reluctantly, of the company he had shepherded from a bankrupt 38-rig Alaskan drilling firm in 1987 into the Swiss Army Knife of multi-national drillers.

Like the British Empire 150 years ago--and thanks to Gene Isenberg--the sun never sets on a Nabors rig, whether the location is offshore, the Middle East, Latin America, a rig up yard in Chengdu, China, the North Slope of Alaska or the U.S.

Gene Isenberg will retain his seat as chairman of the board for the $4 billion dollar multi-national driller while the day-to-day duties of CEO will transfer to long-time associate Anthony Petrello.

The management transition marks the passing of an era in the land drilling space.

Isenberg, a former accountant for Exxon, entered oil services in 1987 by purchasing the assets of a bankrupt Alaskan driller that was a corporate descendant of Anglo Company Ltd. Following the 1989 name change to Nabors Industries, Gene Isenberg constructed the world's largest land drilling fleet a consolidation at a time as the industry began its long road to recovery after the devastation that followed the collapse of the oil industry in the 1981-1986 era.

In so doing, Isenberg shaped the ultimate structure of the U.S. land drilling market during the pivotal 1990s when the domestic industry passed from a loose confederation of financially demoralized regional players into an oligarchic model where a half dozen publicly held firms represented 50% of the drilling market.

Ultimately competition for hegemony of the U.S. land market boiled down to Nabors, Patterson-UTI Energy, which was the union of two rival aggressive consolidators in the late 1990s, and a smaller Tulsa, Oklahoma firm with a seven-decade history by the name of Helmerich & Payne IDC. While Patterson-UTI initially occupied the lucrative commodity rig side of the business, Nabors differentiated itself with a focus on bigger iron for technically challenging drilling, while Helmerich & Payne carved out a niche providing premium high-spec rigs to premium customers.

Under Isenberg's leadership, Nabors consistently perched atop the domestic land market over a decade and a half before Helmerich & Payne's aggressive move to construct a modern technology rig fleet wrested the title of the nation's most active driller from Nabors after the industry downturn a couple years ago.

Isenberg's notable acquisitions include the $58-million purchase of Loffland Brothers Company's international fleet in 1990 and the $38-million Grace Drilling Company asset purchase of 167 rigs in 1993, which cemented Nabors role as the largest land contractor in the U.S. and boosted its domestic fleet above 200 units. More than a dozen other transactions characterized the 1990s and Nabors capped off the decade with the $225-million acquisition of Bayard Drilling Technologies, Inc. just as the domestic drilling market collapsed in 1998. One year later Nabors also executed a $518-million merger with Pool Energy Services Co. to close out the roll up era in the domestic oil services space.

Bayard added eight-dozen high-spec rigs and a substantial equipment inventory to the Nabors arsenal; Pool provided Nabors an entry into the global well servicing market, including the largest well service fleet in the U.S. land space.

Nabors hostile takeover of Pool was less about well servicing than it was the handful of long-term drilling contracts Pool had obtained in Saudi Arabia and other global drilling markets. In fact, Gene Isenberg's personal interest was always in the international space (and the Middle East in particular) where long-term contracts provided insulation from the interminable boom/bust cycles in oil and gas.

But Nabors' fortunes remained linked to the domestic drilling market. Like the nebulous aliens in the television series Star Trek, the company became the Borg of consolidators for contract drillers who were happy to exit a business that saw the dazzling fortunes of the 1980s dissolve into rusting iron during the bleak years a decade later. Isenberg displayed exceptional business acumen in picking up good assets at bargain prices in an attempt to tighten up the land drilling market, though he quipped years later to a newsletter publisher that none of those sellers ever gave him the slightest break on price.

A Rig Is A Rig Is A Rig--Or Is It?

It is difficult to overstate how dramatically the domestic drilling space changed during Gene Isenberg's 24-year run. The question in land drilling for most of the 1990s centered around who would turn out the lights on the domestic sector. Industry attention mostly focused on natural gas in the Gulf of Mexico. Back onshore, rig rates of $5,000 per day were a pale reflection of the $10,000 drilling units earned per day in 1980. There were so many rigs laying around U.S. yards that Nabors, as an acquirer, could buy dozens at a time, redeploy some overseas on term contracts at higher day rates, and still leave an oversupplied domestic market.

But things changed domestically as the major oil companies divested their U.S. holdings and went shopping for oil and gas elephants overseas. Natural gas deregulation created a brave new world in the U.S. and when the offshore sector was unable to meet rising natural gas demand in the late 1990s, attention turned to the onshore space where conventional gas wells could be drilled quickly and cheaply. It turns out all those idled land rigs weren't as drill-bit ready as people thought. Day rates rose in a tight market during 1996-97 and suddenly the U.S. land drilling space became an interesting business with Nabors the clear leader.

Gene Isenberg was ready for the change after creating an investment-grade business in the poor-boy world of 1990s contract drilling. He subsequently parlayed his relationships with capital providers on Wall Street into a multi-national drilling dynamo. He was fond of pointing out to attendees at investor conferences in the late 1990s that Nabors could write a check for $100 million at any time to accomplish its corporate objectives without negatively influencing the balance sheet.

Nabors saw annual revenues top a billion dollars in 1997, and four billion dollars in 2006, about where revenues remain today.

But if the 1990s were all about transformation of the domestic drilling market, the subsequent decade involved transformation of the land drilling industry itself as emphasis changed to new technology rigs to meet the demands for unconventional drilling. Nabors, which had aggregated enormous quantities of legacy equipment in yards worldwide, negotiated the transition partly through pioneering the use of Chinese manufacturing to meet heavy demand for new-technology based land drilling rigs.

It was a market characterized by the things Gene Isenberg liked: long-term contracts for newbuild equipment at dayrates above $24,000—larger even than the earlier awards in the international market.

Isenberg pulled one more rabbit out of the acquisitions hat in August 2010 with the $900 million purchase of Superior Well Services, providing Nabors entrée into the high-flying pressure pumping space.

Investors always liked Nabors because of the international and offshore optionality, though the U.S. land drilling division remained the main ingredient in the company's fortunes, good or bad. Nonetheless, Nabors, as the world's largest drilling contractor, clearly had its hands full when it came to nimble execution in a slowly responding international space and overcoming what appears to be a permanent downturn in Alaska. Investors began expressing a greater interest in the Helmerich & Payne business model along with a rejuvenated Patterson-UTI Energy. After more than a decade and a half atop the domestic rig count, Nabors in 2011 found itself a competitive third behind Helmerich & Payne and Patterson-UTI when it came to active rigs.

A $100 Million Severance

There aren't many roughnecks showing up at the Occupy Wall Street demonstrations around the country. Neither is Gene Isenberg, who ended up on the other side of the barricades from the 99%. While many drilling contractors saw 1980-era fortunes devolve into rusted iron in the 1990s, Isenberg's business success grew out of turning that iron into a Croesus-like fortune of his own. He wisely chose stock options over salary early in his career at Nabors, and when the corporation he headed mushroomed in size so, too, did his personal wealth. Various estimates place Isenberg's aggregate earnings between $500 and $750 million over the last two decades with a consistent annual ranking near the top of the compensation heap for American executives.

In 2006, Isenberg ended up front and center in a growing national controversy over executive compensation when news surfaced that he had exchanged old stock options for newer options at lower prices. Nabors subsequently renegotiated Isenberg's compensation package. Ultimately that package was amended to include a provision that would provide Gene Isenberg $100 million in cash if his duties changed. That provision kicked in Friday and Nabors will take the $100 million charge in the fourth quarter 2011.

By way of comparison, Nabors recorded $104 million in operating income from its lower 48 land drilling division during the third quarter of 2011. Each of its domestic land rigs--more than 200 units in all--generated a record $8.5 million per rig on an annualized run rate for the period, topping the previous $8.1 million mark set in the fourth quarter 2008.

Looked at another way, Isenberg's severance package for vacating the CEO position was equivalent to the annual operating income from 48 of those land rigs, each with a 22-member crew package.

It's nice work when you can get it and Gene Isenberg worked incessantly over the last quarter century creating the world’s largest drilling contractor. As an octogenarian, he was active well beyond retirement age and had outlasted his original oil-services peers. He hosted the last of nearly 100 quarterly earnings calls on October 25th when the company, ironically, announced it was cutting up more than 100 legacy land rigs.

Questions about the succession at Nabors had been part of the investor conversation for nearly a decade. Nabors' board apparently felt it was time for a change. They wrote a $100 million check to Gene Isenberg to bring it about.

Contact the author, Richard Mason, at rmason@hartenergy.com.

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