Describing his appointment as president of Western Geophysical as a homecoming after a stint with Western Atlas Logging Services (now Baker Atlas), Gary E. Jones is very optimistic about Western Geophysical's future. Jones began his career with Western Geophysical in 1980 after receiving a master's degree in geophysics from the University of Arizona. The 67-year-old Western Geophysical has undergone numerous changes since its merger with Baker Hughes closed in August 1999. Jones says that most of these changes stem from the seismic industry's downturn rather than from the merger. Investor What steps are you taking to emerge from the downturn? Jones Western Geophysical made a number of very bold moves in the fourth quarter of 1999. We felt it was our responsibility to step up to the plate and remove excess capacity from the market. That was what our restructuring charge was about. We removed a number of land crews, some data processing capacity and a substantial amount of vessel and streamer capacity from the marketplace. We have seen some anecdotal evidence of similar reductions in the industry about seismic vessels being taken out of service. We believe that the vessel count for the high-capacity 3-D vessels will be down by 30% to 40% during the second half of this quarter, from the capacity that was available in the industry in the third and fourth quarter of 1999. It's a substantial vessel count reduction. Of course due to improved vessel towing capabilities, even with fewer vessels, there is more streamer capacity available on the reduced number of vessels than what existed in 1997. Within the oilfield service industry, the seismic sector probably has demonstrated the most significant gains in efficiencies during the last decade. Investor When do you expect the seismic business pick up? Jones Somebody flipped out the light switch in January 1999. There was a fairly significant drop in activity coupled with price pressure as a result of excess capacity. We are beginning to see some early indications of a pick up. We are getting more phone calls that are fairly widely distributed, both geographically and across product lines in terms of bid requests. Our multiclient data sales in the Gulf of Mexico are ahead of projections. We expect international business to turn around by the fourth quarter. All of this has yet to turn into a serious level of increased business activity. We are still skating along the bottom of the slump. We expect to see a relatively modest to significant pickup in contract awards in the second half of the year. Investor What is Western Geophysical's reputation after the merger with Baker Hughes? Jones Most customers have respected and counted on Western Geophysical throughout their careers. I think there has been some concern over how the marketplace perceives Western. As Mark Twain would put it, the reports of our demise have been greatly exaggerated. I think some of our competitors have attempted to assist a perception that Western Geophysical is in disarray, which is simply not the case. We still retain the lead in overall market share, certainly in overall profitability and geographic depth. We intend to vigorously defend our market share and our leadership position. We expect to lead the industry out of the downturn. We've got the team that can do it. Investor Would you explain how the company restructured along its product lines rather than geography? Jones Our single biggest investment is in our multiclient data library. We moved to a global structure to better manage the opportunities. If you artificially divide the world in half, you are not looking at the full range of opportunities when you make investment decisions. By bringing all the investment opportunities under one management structure, we ensure that we are making the best investments with our capital. Marine operations are a very similar situation. We simply have to make sure that on a global basis that we are matching our assets to the best opportunities. With our reduced fleet size, and our competitive advantages, we are going to be selective where we deploy our assets as the industry picks up. With a global organization for data processing, we are able to take advantage of purchasing power leverage with our suppliers and vendors on the data processing equipment side. It also enables greater mobility of best practices, people and equipment to match the opportunities around the world. We have rolled out a global organization for our land operations with a strong regional focus. We have a very significant, long, historic presence in Latin America managed from our Houston office with local offices in Venezuela, Argentina, Mexico and Bolivia. Our Eastern Hemisphere operations are managed from London with offices throughout the Middle East, Africa, Central Asia and the Far East. Our historic strength in North American operations continues with strong activity in Alaska, Canada, the continental U.S. and the Gulf Coast. Our global product line organization provides clear focal points for our customers as well as enable a greater flow of our people and our assets to the best opportunities that are available. This type of organization is new to us, but without question, it's going to enable faster reaction, quicker response, better operating efficiencies, and better capital and crew utilization. Investor What about the changes in top management since the merger with Baker Hughes? Jones The senior management is solid and experienced, and we are going forward at full speed. We have a deep bench of experienced, midlevel managers, and that has traditionally been one of Western's greatest characteristics. As an industry leader, we get raided from time to time, and people move on. But Western is in great shape, thank you very much. Investor What message do you want to send to the industry? Jones I want to emphasize the experience of our executive team. Despite a relatively small amount of attrition, we still have the most experienced management team in the industry-throughout the ranks all the way to our field crews and data processing ranks. Investor How is the merger going with Baker Hughes and the restructuring going on within Western Geophysical? Jones I think the timing of our merger, which was coupled with the industry downturn, certainly exacerbated any difficulties normally associated with a merger. All of that is behind us now. We have strong support from corporate Baker Hughes and its board of directors. We believe we have the largest capital budget in the industry for multiclient data, and that is one indication of the commitment of Baker Hughes to the seismic industry and confidence in Western Geophysical. We see enormous opportunities in leveraging our reservoir skills and capabilities across all the Baker Hughes divisions. To service this growth opportunity, we recently launched the Exploration and Reservoir Services business unit, which combines elements of Western Geophysical and Baker Atlas. Investor How can Western Geophysical keep all its equipment and crews busy? Jones Our goal is to be the long-term profitability leader of the industry. We have been willing to accept stacking of some equipment and crews to avoid exacerbating an already depressed market. We have delayed deploying a new-build ship, the Western Neptune, which was delivered in January. We decided not to put Neptune into service at the current market rates. However, we look forward to deploying it when market conditions merit as it will be one of the most efficient vessels in the industry. Investor What sets Western Geophysical apart from its competitors? Jones Our biggest advantages are our depth, our breadth, our experience and our people. Other strengths are the technology that we provide and our reputation for quality. About 20% of Baker Hughes' R&D spending goes to Western Geophysical projects. We have been very consistent through the downturn and have sustained our spending on research. We view this as an essential ingredient to our future competitiveness. That said, we differentiate ourselves from some of our competitors in that we don't believe we have to do everything in-house. We actively seek the best-in-class providers of equipment and solutions to our customers' needs. Investor What are some of your current R&D projects? Jones The first and foremost priority is increased crew efficiency, and that is more of an applied technology issue rather than new R&D. Depth migration, depth imaging and prestacked time migration are areas where we have serious ongoing R&D efforts. Investor What about multicomponent seismic and what is its future? Jones Multicomponent seismic is of great interest, and you really have to segregate it fairly quickly into the onshore and offshore segments. Most of the work done to date in the industry has been sponsored research or sponsored applications of emerging technologies as opposed to commercial business activity. The promise is significant, and the potential is clearly there. But the customer community has yet to demonstrate a willingness to pay the prices that are going to be necessary for the seismic industry to make the significant investment in retooling to provide multicomponent surveys. Current levels of pricing and activity won't permit quick development. We are working hard on it, and we will be ready as soon as it makes good business sense. Investor What's your outlook for 4-D? Jones Our 4-D efforts during the last business up cycle were primarily done to evaluate R&D applications of the emerging technology. 4-D seismic allows us to evaluate changes in the reservoir over time. Some exceedingly good work has been published, and some strong economic-benefits cases established. These techniques could become very useful tools to increase ultimate recoveries out of reservoirs and guide the most efficient methods of extraction. Again, we have a situation in which the economics must justify the investments. Personally, I think that both multicomponent and 4-D will become substantial assets in our tool chest, but the real goal is reservoir characterization and increased reservoir understanding for improved drilling and production. Western Geophysical is developing the rest of the tools necessary to deliver the whole package. Investor Where is Western Geophysical in its development and use of solid streamers? Jones This is a clear differentiator for our marine fleet. The Sentrye solid streamer technology, which we have been deploying during the last few years, has been accepted and is, in fact, specified on a couple of recent tenders as preferred technology. We are the only ones equipped with solid streamers at this time. During the course of this year, we plan to complete equipping all of our 3-D vessels with solid streamers. The advantages are improved data quality, lower noise and less environmental impact. Traditional streamers are filled with kerosene, and one of the most frequent problems in marine acquisition is leaks in the cables caused by shark bites. There is no place more prevalent for shark bites than Brazil. We can conduct our work with close to zero environmental impact by virtue of having solid streamers. From a technical point of view, the real advantages are quality improvement and reduced noise characteristics of the cable. We are able to maintain higher quality in worse noise conditions than our competitors and can continue working in weather conditions that would shut down a conventional crew. Investor What are your plans for visualization centers? Jones We have a visualization center in London, and we will be adding more. Houston is the obvious location. From a marketing point of view, there is a huge "wow" factor when you see your data displayed inside one of these visualization centers. We can easily work with our sister divisions-Baker Atlas and Baker Hughes Inteq-to link geophysical data, formation evaluation information and real-time drilling information. Investor What challenges does Western Geophysical face? Jones People. Equipment and technology are fantastic, but you've got to have expert people and their teamwork to deliver results in the difficult geophysical industry. Western's people have always been very highly regarded. When I say it's a challenge, what I am really talking about is the demographics. I recently looked at some statistics on our international land crews. The average age of the personnel on those crews is approaching the low 40s. We enjoy the experience they bring and their contributions to our success. We will continue to bring in new personnel to learn from them and to carry on our strength as experienced employees move up in the organization Investor What is your answer to this challenge? Jones We have been a steady recruiter. So, we are in better shape than most companies, but not in the shape we would like. I anticipate a step-up in international recruitment simply due to the overheated job markets in the States. We intend to recruit aggressively at colleges in the U.S., but there are top-notch universities in the international community, and some increased portion of our recruiting will be done overseas. Investor What is your outlook for the seismic industry in general, and what role do you foresee for Western Geophysical? Jones I'm optimistic about the industry over the long haul, but we've got some tough sledding to go. One thing I can assure you is that there will be a geophysical industry 10 and 20 years from now, and Western Geophysical intends to be the profit leader in that industry. We've seen a lot of people come in and flash the latest, greatest, hottest thing. Yet, 10 or 20 years later, we are still here and they are not. M
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