Not every rental company will profit from the fervent search for and development of energy sources. But for some, it can be, literally, like striking oil.
Energy is the essence, the lifeblood we cannot live without. Other than food and water, nothing is more essential to human existence, and without it, there certainly wouldn't be food for most of the 7 billion people on the planet.
How important is energy to the economy? In the month of June, the Canadian province of Alberta, which has a population of 3.7 million, created more jobs than all of the United States, which has a population 85 times larger. Granted, June 2011 was a pretty low period in the history of U.S. job creation, but nonetheless you get the picture. The extraction of oil from Alberta's oil sands was riding another wave of production and exploration and there is no hotter fuel for the economic engine than oil.
Energy independence is a major political and economic priority in the U.S. and has been for some time. Industries such as wind farming and solar power have grown dramatically and are entering into the mainstream of energy production in North America. The hottest growth area is shale gas, facilitated by significant advances in technology that make the extraction of shale gas far easier and less expensive than in the past. The U.S. Department of Energy said more than 200,000 jobs have been created over the past few years by the development of domestic production of shale gas.
Oil and gas exploration, as well as other energy-related industries, have also contributed significantly to the economy of the equipment rental industry. The past few years have obviously been like being stuck in tar for the construction industry, but those fortunate enough to supply equipment to the energy exploration and production markets have held their own pretty well and the energy markets show signs of continued heating going into 2012.
It's not a market for everybody. It's a lot more likely that companies like United Rentals, RSC Rental, Sunbelt Rentals, Hertz Equipment Rental Corp., H&E Equipment Services and their ilk will profit from the energy markets than small independent rental companies, unless they happen to be strategically located. The big players have the financial capital and fleet to invest in big projects or the capacity to obtain additional fleet to satisfy the demands of a major customer. If a customer — that probably already has a relationship with a national player — asks for 20 excavators next week, those companies can accommodate the demand. A small rental center most likely cannot.
Even a lower-level RER 100 company is really not equipped to swim in those waters.
“If somebody calls us and they want 15 large pieces of equipment for six months, it's a little harder for us to put the deal together than for a national that can make three or four phone calls,” says Mark Clawson, CEO of Diamond Rentals based in Salt Lake City. “We try to play to our strengths rather than be in situations where other people have a competitive edge.”
For Diamond Rentals, being a primary supplier for an oil-exploration firm is not its strength. However, the energy business creates a lot of opportunities besides the drilling for and extraction of oil, or the construction of a facility to manufacture solar panels. When exploration is going on, vast areas of infrastructure are needed — everything from living quarters, offices and other buildings, roads, and businesses that support the energy-exploration process. That's where the smaller outfits can find their niche.
“What really works for us is to be an incidental provider to the people that are up here,” Clawson says. Companies like Diamond find their niche in short-term rentals to smaller contractors. While the big players might provide the 15 loaders, “if a guy can't get a submersible pump or a jumping jack or a compressor, we are the guys who are going to make it happen on short notice and we can get it to them for two days or a week or whatever they might need.”
Diamond has filled in other niches such as selling a clear-span tent used in the tundra-like conditions in winter to store equipment, or the sale and service of light towers, compressors, small generators or pumps. Diamond also rents reach forklifts, one of the most sought-after pieces of equipment on oil and gas exploration and pipeline-construction jobs and manages to get some pieces rented despite the power of the larger players.
Typically earthmoving equipment is the inventory most often used on energy-exploration jobsites. “Excavators up to about the 240 size, wheel loaders up to about the 110 size, reach forklifts, wheel loaders with forks are often requested items,” says Mike Crouch, vice president of business development for Volvo Rents. “Also light towers, generators, dozers, booms, air compressors.”
“Dozers like a D-6N, 145-horsepower dozers, excavators and telehandlers that help handle the pipe are in demand,” says Jay Dinger of Louisiana Machinery, Reserve, La. “And they have to have water trucks. On a pipeline project, you get a pretty good variety of inventory but those are the basics.”
Marc Mandin, chief operating officer of 4-Way Equipment Rentals, Edmonton, Alberta, says sometimes it is the niche items that provide better returns. For example, temporary heating equipment is a strong rental item for rent to the oil sands project in nearby Fort McMurray. “Sometimes something as simple as a concrete buggy becomes a good item,” Mandin says. “Not a lot of companies handle those. Or mortar mixers, we probably own more mortar mixers than every rental house in Edmonton combined. Over the years, we've developed a few niche markets like that.”
For smaller companies it may not be the energy project itself but what surrounds it and the impact it has on the economy. “That's where we've been successful and have been able to ride that wave and provide the contractors,” adds Mandin. “A lot of our work related to residential construction are things like duplexes and high rises. When they are building those, that's where we fit into the niche.”
A variety of equipment can be used on wind farms. Pioneer Equipment Rental, based in Oklahoma, where there is a lot of wind farm activity, rents reach forklifts as well as generators, and light towers to wind farms. Companies that have access to a 290-foot Bronto Skylift can rent the machine for blade inspection and other maintenance tasks on wind farms.
“Wind generating stations have been big for the last couple of years, and now solar is starting to grow,” says Matt Flannery, executive vice president, operations and sales, United Rentals.
“In the pipeline area, you find a broader cat class of equipment is needed, everything from earthmoving to aerial,” says Mark Denny, industrial accounts manager for Ponca City, Okla.-based Pioneer. “When you get into the exploration end of that midstream, it's typically four categories: light towers, generators, reach forks and pumps.”
No rooms in boom town
Companies such as Diamond or 4-Way that just happen to be in a particular area near an energy-exploration region can find their niche. For a similar smaller company to try to expand into an energy-producing area, it might find some formidable hurdles to entry. The costs of setting up operations in the boomtown-like environments that proliferate near energy sites are extremely high and that's where the national players can leverage their size and power as well as fleet size.
Not only is there a challenge to find a suitable property, but the cost of land suddenly flies through the roof, and along with it, the cost of labor.
“That's really when you decide what opportunities you're going to go to and what opportunities you're not,” says Flannery. “The drivers are: can we get the labor that we need, that's number one, is that labor affordable and is the real estate affordable? We've been fortunate in that we've been able to find good people that will travel as well as good people locally. But that's the biggest challenge in these new opportunities because all of a sudden, a very remote area is overwhelmed with opportunity that you don't always have the infrastructure or labor pool to supply. The equipment eventually you can get. But you need to have the manpower and the facilities to service them. The Bakken shale, as opposed to some of the other shales, is a little more remote and a little bit newer right now, so not everyone is actually staged yet.”
In a “gold-rush” atmosphere, even if a company does have the labor pool, it's going to cost to keep them.
“If you're a service tech who really knows his stuff, you're in demand,” says Don Coleman, rental manager for Caterpillar dealer Tractor & Equipment in Williston, N.D., an area close to the Bakken Shale site as well as another shale site in South Dakota. “The oil fields are willing to pay way more than we are, it's amazing. A guy making tacos is making $16 an hour. You want to stock shelves at Wal-Mart, you'll make $15 an hour. You go to McDonald's, you get $15 an hour and a $500 sign-up bonus. Driving a 10-wheeler is $25 an hour for the average driver. If you come here and you want to work, you'll get hired.”
As much as labor is in demand, so is equipment.
“I could use 40 excavators right now, I can't get them,” Coleman says, adding that Cat and Tractor currently has more than 600 pieces in the oilfield on rent. “We're at 92-percent utilization right now,” he says. “We're not even close as far as keeping up with demand.”
In addition to the challenges of property and labor, a company such as Tractor & Equipment, that has been doing business in Montana, North Dakota and Wyoming since 1929 and has deep roots in the community and the ways of doing business in the rugged north, has the advantages of relationships and local reputation. While many rental customers in energy boom areas are from outside the territory and have national account relationships with national-account rental companies, local roots and relationships still go a long way.
Larger rental companies must consider how long a particular area will last as a productive region before making the kind of infrastructure investment required to succeed in this level of competition. According to Coleman, the activity around the Bakken shale is only, to use a baseball analogy, in the first inning, or perhaps still during pre-game warm-ups.
“They say they'll drill for oil for 15 more years, five more years for gas after that and another five or 10 years to complete infrastructure,” Coleman says. “They said this is not a boom, this is a lifestyle, and we're looking at 25 years. And they're building the facilities to prove it. Everywhere you look they're putting in multi-multi-million dollar facilities. They do their homework so these guys know what's going on. It's going to last.”
Another hot region is West Virginia and Pennsylvania where exploration is accelerating on the Marcellus shale. “That part of the world has gone nuts,” says Richard Sinclair, CEO of St. Albans, W. Va.-based Jefferds Corp. “It's the biggest thing to hit West Virginia in years.”
Shale gas reserves were referred to recently by Business Week as fuel that could reignite the U.S. economy. Having gone from almost no shale production in 2000 to more than 13 billion cubic feet per day, shale now provides about 30 percent of the U.S. natural-gas supply, a percentage that is likely to continue to grow significantly. Major breakthroughs in horizontal drilling technologies as well as hydraulic fracturing or “fracking” have led to the overwhelming increase in shale production. Geologists had long known that deeply buried shale formations contained huge reserves of natural gas, but lacked the means to extract shale gas profitably until recently.
Don't wait for the Wall Street Journal
Unlike the construction world, where Dodge Reports help contractors and rental companies know what jobs are on the horizon, it takes a bit more legwork to keep track of what's coming up in the energy business. Large rental companies with national accounts involved in energy jobs will often hear about projects from their customers, but for others it takes hard work by sales staff communicating with customers and contacts the old-fashioned way.
“A lot of it is word of mouth,” says Sinclair. “If you're in it and you're there, you might be sitting with people in some restaurant and people are talking about it and you just pick up information and run with it. Some of them are dead ends, but most of them aren't.”
“We speak to the developers,” says United Rentals' Flannery. “That's really your best opportunity. We try to get in ahead of the time before things are public information. We participate in power trade shows, and specialty trade organizations for some of these opportunities. We really feel that getting information early gives us a better opportunity to succeed and we're really focused on that. If you're waiting to read about it in the local paper or the Wall Street Journal, you're probably late to the game.”
In addition to making relationships, sales personnel need to learn the way the targeted industry operates. “You kind of become one of them,” says Pioneer's Denny. “You really learn how to adopt their problems and you learn how to do that by learning their daily routines and what they're working on.”
Who to talk to
When it comes to energy markets, rental companies deal with a variety of types of customers, similar in some ways to construction markets. In many cases, rental companies deal on the corporate level with large corporations with national accounts. However a lot of the activity is still transacted on a local level.
“It's a mixture of both,” says Flannery. “Actually it's no different from most of our national accounts as far as the sales process where we will have high-level relationships corporately as well as sales-level relationships to solve day-to-day problems with the superintendents and project managers onsite.”
When it comes to shale exploration, rental companies report a wide variety of clientele. “Some are like wildcatters in days of old when you get paid when they get paid,” says Sinclair. “Some are start-up companies that don't have a lot of assets and life is good as long as it's good but all it takes is one big hiccup somewhere and you don't get paid or don't get paid for a long time.”
“In the beginning, the relationship is typically between someone like myself and what I'd call their procurement department and possibly their chief of plant maintenance,” says Denny, whose company supplies the petrochemical industry as well as pipeline projects. “Each one of them has a little different infrastructure in how they manage the flow of information.”
“It does tend to be more driven at what we'd call the office level or the purchasing agent level,” says Benno Jurgemeyer, CEO of Phoenix-based Sunstate Equipment. “For example for one of the solar projects, we had courted a development company for almost two years before they actually broke ground. So the relationship started very high up in that company and the relationship had been established before they ever got the construction going.”
“We're actually dealing more with the subs that the producers hire to develop the site,” says Brad Cofield of Colorado Springs, Colo.-based Wagner Rents. “Our power systems group deals with the corporate groups and the drillers themselves more than the rental side does, so we need to have a lot of communication internally.”
Energetic rate structure?
In hot markets with considerable demand, one would expect higher rates to be the norm, but rate pressures still apply. Companies that deal in larger equipment, such as Caterpillar dealers, are sometimes in a better position to get a better price because fewer competitors have the larger machines. When demand is high, that helps rental companies to gain better rates.
“Rates are quite decent actually and at this point in time, it's sort of a supply and demand phenomenon and in some cases there just isn't enough supply to meet the demand,” says Jefferds' Sinclair.
In addition to the challenges of high costs to enter energy markets, rental companies point out that another difficulty is that equipment tends to, in some applications, take more of a beating especially in oil fields and other jobsites in remote locations.
With huge concerns about energy and the need in North America to become less dependent on other countries to satisfy our energy needs, there will be more energy exploration in the coming years. Solar power and wind power, while having their ups and downs, will continue to expand and grow. More shale digging will take place, more pipelines will be built, and more efforts will be made to find sources of energy.
Environmental issues will not go away. People will protest projects such as pipelines, and organizations such as the EPA will certainly have their say in what projects go forward. But no matter how it shakes out, energy markets will be more significant to the rental industry in years to come. Those markets won't work for everyone, but there will be opportunities for many.