The oilfield equipment rental industry finds opportunities and competition abound in thriving times.

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As the rust belt continues to jettison inhabitants, hurling them at high speed toward the deep flowing wells of the Permian Basin, many newcomers in the service industry land at the corner of Opportunity and Reality streets.

The opportunities in the Basin abound. Many construction projects take weeks or months to get started because existing businesses are swamped. Newcomers could move right in and get to work. Could, that is, if their employers could afford the tens or hundreds of thousands of dollars for heavy equipment needed to build drill pads, roads, frac pits, pipeline routes, and other drilling and production infrastructure.

Large scale equipment rental companies such as ASCO and area newcomer Kirby-Smith are meeting that need by renting and leasing that equipment on a job-by-job basis, says Kirby-Smith Territory Manager Kevin Demel.

“For new customers, rentals are very strong. Most of these new customers are start ups,” Demel noted, adding that, over an eight-month period beginning late in 2012, his company had broken many revenue records. “It’s been incredible,” he said.

Their rentals-to-sales ratio is currently approximately 75 percent to 25 percent. Much of that differential is accounted for by newcomers to town who want earth-moving equipment for pad site construction and pipelines. These newbies want to get the income flow rolling before they purchase equipment. Also, they know they need to learn what kind of equipment is needed in this area, as opposed to where they have been operating.

“Our biggest market these days is helping out-of-state companies know what equipment they need for this area’s soil conditions—which are different from what they’re used to,” Demel said. The thin topsoil here quickly gives way to rock and cliche.

Companies used to doing business in Louisiana, Arkansas, and even East or South Texas are tempted to start with equipment that just moves soil—only to find that machinery is useless within a few inches in many cases.

The newcomers quickly learn to rely on advice from locals about what equipment is needed. Renting allows them to quickly recognize any mistakes and to trade the wrong equipment for the right stuff without a huge cost.

Kirby-Smith is itself somewhat of a newcomer to this area, but not as new as it may appear. They moved to their current location on I-20 just east of Odessa in October of 2012, but Demel was working from his home for two-and-a-half years before that, with equipment and service technicians coming from the company’s Lubbock office. It had been apparent for a while that the Basin boom was calling them loud and clear to set up an office, but that very boom made finding a good location and a reasonable price more of a challenge.

What equipment is most popular varies throughout the year, but there is a pattern, Demel said. Being familiar with the progression of clearing brush and leveling land, then building the pad, grading roads, and digging frac pits, Demel and his staff can often anticipate the work flow, making sure they have in stock the next piece of equipment when it is needed.

ASCO, whose full name is Associated Supply Company, Inc., has had a yard in Midland since 2001, and one in Odessa for a like amount of time. They moved to their current Midland spot on Cotton Flat Road about four years ago because they needed more space than they had had about a block away on Garfield Street.

Branch Manager Nick van Cleave said their highest-demand items on the drilling side are telescoping forklifts. For site building they rent a lot of boom lifts, backhoes, Bobcats, compaction equipment, and some bulldozers and graders. Most of this is rented to the dirt contractors. Van Cleave noted that the producers themselves rarely rent equipment. Even if they pay for it, the contractors will contact ASCO and take care of the pickup and return.

For ASCO, dollar-wise, rentals and sales are “really pretty even.” Volume-wise, in the number of pieces of equipment going out, there is much more on the rental end, he said, but those dollar figures are much smaller per machine since rentals are only a small fraction of the cost of the machine.

With a total of 19 locations in Texas, including those nearby in Odessa and Lubbock, van Cleave said he is able to borrow machinery from those other offices whenever needed, just as they borrow from him on occasion, creating flexibility without the necessity of every location having a huge inventory of every piece of equipment.

Both Kirby-Smith and ASCO make service work a priority. As to how well they keep up with service work in a booming economy, van Cleave said, “It depends on the day.” If everyone needs service on one day, things stack up more than on a slow day.

For Kirby-Smith, the continued growth is leading to plans for a shop expansion in the near future. “If we continue to grow we plan to add more bays to the shop,” said the company’s branch rental manager, Mike Fuentes. When that happens, Demel added, they will need to add staff.

Onboard diagnostics help Kirby-Smith pace much of their work. Computers on the machines track usage and report that along with any breakdowns through a satellite link. Office personnel are then alerted when it’s time to change oil or when service of any kind is required. For maintenance, the Kirby-Smith office contacts the renter and schedules a time when they can have the machine for the time necessary to do the work. For a breakdown, the computer diagnoses the problem so the technician knows what parts to bring and exactly where to begin working.

Kirby-Smith and ASCO also rent road equipment to paving companies keeping up with the demand for new roads and road repairs that are another byproduct of the oil boom.

The migration to the Basin is not restricted to service companies. Other rental firms have also come to town looking for their piece of the ever-growing pie. Many try to begin by competing on price, a tactic neither ASCO nor Kirby-Smith tries to match. Instead, for ASCO, they fight back by doing their best to “provide better service,” said van Cleave. “We’re good at what we do, we’ve been doing it a long time–and that’s just business, you’ve gotta be better than the next guy.” Kirby-Smith has also been around, as a company, for years, and has built a huge inventory of machinery. For example, “We have 250 cranes in our fleet,” said Demel. They likewise have a sizable inventory of boom trucks and other equipment. Neither company will negotiate to the point that they lose money on a deal.

Smaller companies have more concerns about the new guys. Arayot Rentals, owned by the husband-and-wife team of Ken Levy and Wanda Scroggins-Levy, started out renting light towers and generators. Now, due to undercutting by newcomers, their primary business is in trash trailers and pressure washers.

“They’ve gotten so competitive with the light towers, the whole rental’s like $29 a day,” Scroggins-Levy reported. “We really can’t make any money like that. We try to stay competitive with some of the others, but it’s pretty tough out there right now with that.”

Scroggins-Levy said some future competitors have called her thinking Arayot was a home rental agency—then those people rent some equipment from Arayot to clean up the yard of the house they end up with before beginning their own business. At least that way she knows who is coming to town.

Most rentals are to service companies, but some trash trailers, generators, and pressure washers go to production companies. Some of the pressure washers also go to production companies for use on production equipment.

Arayot is taking several steps to get past the box they found themselves in. They have added cleaning services and hotshot services and have begun doing service and repairs on equipment beyond that which they themselves rent. Pending the procurement of DOT licensing, the company is currently doing just small loads of 10,000-11,000 pounds.

Scroggins-Levy said clients have told her that, for certain equipment, there is only one other service company in the area, and that company is swamped with work.

The good thing about competition is that it keeps everyone sharply focused, van Cleave noted, and it gives customers every opportunity to get the best service and price possible. Scroggins-Levy added that, with the opening up of the Cline Shale, opportunities will continue to abound, but so will competition—a situation that puts rental firms at the same intersection of Opportunity and Reality streets as the service companies.

Article Source:PB Oil & Gas