That’s what the equipment rental business is. A thriving industry in its own right, it keeps other oil and gas operations humming, and its own fortunes chart a picture of the health of everyone else.
By Paul Wiseman, special contributor
Equipment rental is big. Bigger than ever. And it’s headed for unprecedented heights in the Permian Basin—partly because the way business is done overall in the Permian Basin has been changing as well.
In conversations with four of the major firms supplying rental equipment to the Permian Basin (Yellowhouse Machinery, Warren Cat, Kirby-Smith, and ASCO), PBOG magazine found that this is an industry that has experienced a steep growth curve for a number of years, and has undergone considerable change beyond the sheer fact of growth. For instance, the types of equipment that are in greatest demand today are not necessarily what was in greatest demand even just a few years ago. Plus, changes in the work practices of customers are dictating the inventories of rental companies. It’s a fast-moving, high-volume world, this world of rentals, and it holds a mirror up to the fast-moving, fast-changing oil and gas industry it serves.
Yellow and Green
Yellowhouse Machinery Company is, in Permian country, synonymous with John Deere—a brand that has established itself as a mainstay in the oil patch. Jamey West, South Texas Division Manager at Yellowhouse, says that his company’s offerings are diverse, but the job that really tops the charts is earth moving.
“That’s our core product,” West said. “Dirtwork. Moving materials. And in that area, you’ve seen the rental market just explode, along with sales. Rentals lead into sales for us, and our main forte is selling the equipment—buying, selling, and trading equipment. But we are a rental company, and the rentals end of the business fits our business model well.”
West said that Yellowhouse has paid attention to the way that the oil and gas industry has sparked the housing industry, and stimulated local governments—both municipal and county. As the oil business has fared, so have communities.
Currently Yellowhouse has nine stores in Oklahoma and West Texas, with three of the stores in the Texas panhandle and three in what he termed the “oil triangle” formed by Abilene, San Angelo, and Midland/Odessa. West manages those. He keeps track of the oil and gas business, partly because he has friends in the industry, and largely because his business “kind of revolves around what oil and gas is doing.”
West says that “everybody is upbeat and expecting this [strong phase] to last.”
There are changes going on, he says. “What is see is a better infrastructure developing, especially coming east from the Permian Basin. I know everybody is saying that it’s going to be busy here [in the eastern Permian], but the infrastructure may take a couple years to get to where they need it, for this region to be as busy as everywhere else. Take San Angelo, for instance. I think we have five hotels going up right now. In April, San Angelo has the County Commissioners and Judges Convention. Back in December I made reservations, but I was lucky to get them for that week of April 21st at a local hotel. So you can tell just how busy things are, and you can just see the traffic increasing. You can see some of the activity migrating from Midland-Odessa toward San Angelo and Abilene. It’s going all over.”
The Quick and the Dead
Pipeline construction activity brings good business to Yellowhouse. “The pipeline is kind of like ‘the quick and the dead,’” West said, with tongue in cheek. “When people move in for the pipeline—whether it’s the welders or contractors or the equipment providers—they need a lot of equipment quick, and then they’ll be done with it and move through the area quickly.” Hence gone, and dead.
West said that expansions are in the works for Yellowhouse. “We finished a remodel in Abilene last year,” he said. “And in December 2013 we wrapped up the remodel of the Odessa store. We currently have plans to build a whole new facility in San Angelo. We’re kind of limited to the area we cover. John Deere sets the counties we cover. Right now, I believe we cover 94 counties in West Texas, so that is dang near half the state of Texas. So the footprint for Yellowhouse is rather large.”
Where Dirt Work is King
For other rental firms, the intensity level is comparable. Dirt work is a key component for everyone. There are a whole lot of customers out there looking for help moving mountains of earth to build drilling pads, roads, frac pits, pipelines, and other oilfield projects.
Two leading oil patch rental companies, Warren Cat and Kirby-Smith, indicated they are in high gear keeping up with the demand for dozers, excavators, motor graders, compaction equipment, and wheel loaders, along with other equipment like forklifts. Both George Denny, branch manager for Kirby-Smith Machinery, and Tommy Reynolds, general manager of rental, allied, and used equipment for Warren Cat, said they are constantly looking to expand the fleet and to keep the inventory fresh by turning used equipment.
Saying that business has grown consistently over the last several years, Warren Cat’s Reynolds explained, “We continue to grow our rental fleet pretty much on a daily basis.” There has always been growth since the mid 2000s, but the rate has varied over time. “There were periods in there where, as we were ramping up from coming out of the downturn in 2009-10, that it probably grew at faster clips just because we went from dead to crazy, but we’ve never been flat as far as our growth, and we’ve never stopped growing the rental fleet.” He added that both sales and rentals have built up over that period.
Both companies keep the average age of their fleets at just over two years, with Denny listing theirs at 27-28 months and Reynolds pegging Warren Cat’s at 26. With that as an average, there is, as Reynolds observed, some inventory that is brand new and some that is around five years old.
To grow their fleet, Warren Cat typically buys more than enough equipment to just replace what is being sold. “Our total unit count and our total dollars invested continue to grow,” said Reynolds. Higher costs are driven both by boosting inventory and by the fact that equipment becomes more expensive year-over-year. Cost of each piece of equipment is driven up, at least in part, by tighter and tighter emissions control demands and new technology.
Kirby-Smith currently has 2,200 units in its fleet, which seems like a lot, but as Denny observed, with demand so high, keeping the right mix on the premises is a challenge. The company keeps close records of what is in demand, and can trade equipment with another location when necessary to keep both lots’ inventory within the balance needed for their markets. “So far we’ve done a pretty good job,” of that, he said. “Right now I’m sitting down with our owner, Mr. Kirby, and our management team to figure out how we can better serve the Permian Basin with the right product at the right time.” They look at 2-3 year trends to anticipate demand.
At this point that demand is led by dozers, according to Denny. “Our rental of those, as far as utilization rate, is between 90 and 100 percent right now.” Wheel loaders—also known as articulated fork lifts—are number two, followed by excavators.
With utilization of dozers at close to 100 percent, Kirby-Smith’s goal is to buy enough additional inventory to have a choice of equipment on the lot any time they are needed.
Needing It “Yesterday”
Denny noted that customers often are unable to plan ahead as they would like, and are forced to come in needing equipment “yesterday” in order to meet their clients’ demands.
Even when the product is in stock, some that has just been returned is in the “off-rent” inspection process where technicians check it over thoroughly to determine what repairs are needed, if any, before it is sent back out. Denny said his technicians are expert at determining what damage was normal wear and tear and what was neglect, the latter being billable to the client in many cases.
Dozers are also the number one rental item for Warren Cat, according to Reynolds. “Earth-moving equipment in general, but dozers, excavators, motor graders, and compaction equipment” top the list.
Another Warren Cat division rents diesel generators and light towers for any application, but in Midland/Odessa and in Oklahoma, it is mostly for the oilfield, all of which is in a strong growth mode. Not surprisingly, however, Reynolds sees a lot of machinery going to commercial applications, as strong oil production fuels commercial and residential building as well.
Toward Abilene, even with the Cline Shale on the horizon, most rental interest there has been from wind farms and pipelines—Reynolds said the drilling activity there still seems to be tentative. “Our business in the Abilene area is strong right now, but it has more to do with the pipeline work than it does the Cline Shale.”
Give Me Land
Expansion is not confined to adding inventory. As inventory grows, it needs more space, and Warren Cat has recently added a new 25,000-square-foot facility to accommodate that. This was in response to the fact that, “We actually ran out of space several years ago,” Reynolds said with a laugh.
There are two main groups who are customers. One, said Reynolds, included general contractors and oilfield contractors, who generally rent earth moving equipment. For large engines, which come from another Warren Cat division, the demand arises more from the producers. Engines include natural gas and diesel generators, which power pumpjacks, camps, and other locations that are beyond the electrical grid. Most natural gas generators run off of produced gas, saving money for the producer.
Both companies offer rent-to-own options, which accomplish two things: they help the rental company turn inventory, and they allow the client to keep options open as to whether to just rent or to end up keeping the machinery.
Keeping the fleets fresh allows the regular incorporation of new technology. The higher emissions standard spoken of by Reynolds is one aspect, while technology and fuel efficiency are others. Denny noted that the new Komatsu equipment uses 10 percent less fuel than previous models, which is important to clients looking to lower their costs.
Another new product that is very popular for Kirby-Smith is the earth mover that includes GPS technology. The GPS allows the specifications for the road, pit, pad, or other project to be input into a computer, which means the operator needs to know little more than how to move the machine forward or backward. Thus, the training time for a new operator is drastically reduced, allowing companies to expand their work force quickly, without nearly as much training as was previously needed.
The Rationale for Renting
More and more, new equipment is being sent to market through rentals, Reynolds observed. Just last year the number of new products that were introduced to the market through rentals instead of through sales directly to end users reached 40 percent. Just a few years ago, he related, that number was just 20 percent. “There’s definitely a shift from buying and owning to sourcing the equipment to a rental house.”
Denny and Reynolds agreed that renting allows end users to add equipment more quickly than they would by purchasing, and it means if there is a slowdown or a shift in business, they are not stuck with equipment that is neither needed nor paid for. It also means that the entire cost goes against expenses, without the need to amortize for tax purposes.
And if the contractor has one job in the Permian Basin and the next job is in Eagle Ford, they do not have the expense of hauling owned equipment across Texas. They can turn in their machinery in Odessa/Midland, drive the crew to South Texas, and rent the dozers there.
Both companies value their service department and make every effort to hire, train and, most importantly, keep employees in that department. Over the last two years, Kirby-Smith has averaged spending 1.8 million hours a year on training their service personnel. When service on a piece of equipment is needed, their goal is to get it done within 24 hours.
Providing at least temporary housing is one way Warren Cat deals with the issue. They have long term leases with some apartments in the area to accommodate employees hired from other areas. This gives the new people a place to live while looking for more permanent housing.
With many challenges come many opportunities to solve them creatively. If solutions require moving heaven and earth, area companies like Kirby-Smith and Warren Cat are equipped to help.
Adding to a Legacy
At ASCO, which is totally within Texas but is so big (22 stores, 19 locations) that they have country music star Trace Adkins as their celebrity spokesman, business activity is badonkadonk-big.
Brax Wright, CEO for the family-owned firm, said that they “sell, service, and rent the whole range of material handling equipment and heavy construction equipment used in the oilfield, from little lift trucks to hydraulic truck cranes and cherrypicker cranes.” But the hottest equipment in oilfield applications, he said, is the telescopic material handler—the shooting-boom-type lift truck—and the personnel boom lift. ASCO rents both.
“TMH’s and personnel lifts have really become hot items in the oil field,” he said. “Some of this is a result of safer operating regulations and practices by the oil companies. We run an amazing number of telescopic lift trucks in the oilfield. Other in-demand items are air compressors, light towers, generators, loaders, excavators, and cranes.” ASCO also does a big business in earth moving equipment, like the other companies consulted for this report.
Wright said he has heard that the trend toward leasing equipment, rather than buying it, is expected to continue and even pick up pace. “I’ve heard that in the next six years, in the oilfield, equipment is expected to be 70 percent leased, instead of purchased. It’s an industry that is also supposed to grow to the $30 billion mark in the United States by the year 2020.”
At ASCO, the sales department is still larger than the rental department, when only dollar figures are considered, but “the rental department has grown just tremendously in the last 20 years we have been in the business,” Wright said. “There are years when rentals will be very close to sales and then there will be years when the sales department will leap ahead by a bunch. Sales still lead in our company, but rentals are a large sector.”
Asked if he has any ideas why things are moving as they are, Wright said that he feels oilfield operators want to use their capital to drill wells and produce oil, not to acquire equipment.
This trend mirrors another, larger trend that has been unfolding more gradually, but over a much larger timeframe. That trend is the oilfield’s transition from vertically oriented companies to horizontally oriented companies. It’s been going on for decades.
Wright observed that it’s been a change that has been going on his whole life.
“I was born in a Humble Oil camp in East Texas,” he said. “Of course, Humble is today Exxon. That was just a name change, not an acquisition. But my dad was an engineer for Humble Oil and at that time Humble Oil did it all.”
Humble Oil, like so many of the major oil companies, did everything from prospecting to leasing to drilling to completions to refining and even retail marketing through its nationwide chain of filling stations. The age of the “service company” was in its infancy.
“Halliburton was around, and a few of the names that you still hear today, but Humble did it all,” Wright said. “Now [go forward] 20 or 30 years, to when I was a drilling engineer for Humble Oil. At that time, I was in the offshore district, out of New Orleans, but it was just amazing—most of the people on our platforms were contract people. So that trend has been going on in the oilfield all through my life.”
And the business of outsourcing tasks to service companies is echoed in a new way as companies—service companies as well as exploration and production companies—turn to leasing to keep themselves out of the “business” of hardware ownership. They rent, and they stay nimble.
Feeling the Pulse
How well can the rental companies “read” the activities, tendencies, and propensities of the oil patch?
“We can’t always tell—and maybe we can’t ever tell—what is going in the back rooms of the big oil companies,” said Wright, “ but we can always tell when they are in—I don’t know what you’d call it, but—a ‘holding pattern’ or a ‘watch pattern,’ because the demand for rental equipment may level off for three months to six months. It won’t drop a bunch but it will level off. And then all of a sudden it’s like the projects get approved or something and the demand increases greatly. I don’t know what’s going on in the back rooms, but when I was with Humble, we were planning projects three and five years out. So maybe the planning range has shortened now. But we can certainly see the up and down demand.”
Are we currently in an up cycle, or a down one?
“In the Permian Basin, we are certainly definitely up,” Wright said. “Lots of demand. The Eagle Ford, out of my San Antonio store, was like a gold rush for the last three or four years. And now it is coming of age, and that has been a very interesting project to watch. I think there is some consolidation and some different business practices being implemented. In the Cline Shale, from San Angelo up this way, we don’t know what that is going to bring, but that continues to increase in volume. So that is very exciting to watch.”
Asked where the hot spots are, as far as ASCO stores are concerned, Wright cited several.
“We have a little store in Perryton, and they are just booming. We are just shuffling equipment over there all the time for the oilfield up there. Same way in San Angelo for the Cline. We have stores in Midland/Odessa that are just—well, they will rent everything I can get to them. And then we have a store in San Antonio that is busy all the time with the Eagle Ford.”
ASCO, a 54-year-old family-owned concern, is currently led by its second-generation owners but the passing of the baton is in progress. “I’m doing that pretty slowly,” Wright says, “but we are doing that today. We acquired a Case equipment dealer that stretched from Dallas to Houston. That was in May 2013. So we are still in the consolidation phase of that, trying to get our hands around all of that, but that is coming together great and very quickly. We do have other acquisition plans that are in the planning stages. We have made contacts and have made verbal agreements with other companies that are within the state. As you get larger, people start contacting you for lots of deals like that. We had an opportunity to move into Louisiana and Mississippi the other day and I thought that that might be a bridge too far.
“For this generation, anyway.” He paused, and laughed. “Maybe the third generation wants to.”
For more information on ASCO, visit ascoeq.com. For more on Yellowhouse, visit yellowhouse.us. For more on Kirby-Smith, visit kirby-smith.com. For more on Warren Cat, visit warrencat.com.
ASCO Shoulders a Big Load for Children’s Miracle Network
ASCO Equipment, a Texas-based construction equipment distributor, presented a check to Children’s Miracle Network (CMN) in the amount of $250,546 to benefit CMN’s ongoing efforts to provide comfort and treatment for children across Texas.
The check resulted from a yearlong effort by local employees at ASCO’s 20 locations to benefit CMN in 2013. ASCO has a corporate and personal commitment to community and philanthropy, selecting deserving organizations each year to benefit from the efforts of their employees and staff.
Employees at each ASCO location determined the individual fundraising efforts. ASCO and the founding Wright family matched all money raised to reach the total amount.
Courtney Vanderham, who is a third generation member of the Wright family, led the statewide philanthropic project.
“I’ve grown up with the values that you give back to others,” said Vanderham. “It’s been instilled in our whole family and we’re fortunate to be able to make such a large impact for the non-profit organizations we work with.”
About ASCO Equipment
J.W. (Bill) Wright founded Associated Supply Company, Inc. (ASCO Equipment) in Lubbock, Texas, in 1960 as a Towmotor lift truck dealership and U.S. Army surplus equipment store. Bill attended Lubbock High School, graduated from The University of Oklahoma with a degree in mechanical engineering, served with the Navy Seabees in the Philippines in World War II, and then spent 15 years as an engineer with Humble Oil and Refining Company prior to returning to Lubbock to start Associated Supply Company, Inc. (ASCO).
Today ASCO is the oldest material machinery and construction equipment dealership under continuous single-family ownership in West Texas. Bill, Brax, and Steve Wright work with more than 500 company members from 20 locations in Lubbock, Amarillo, Odessa, Perryton, Midland, Clovis, Wichita Falls, Abilene, San Angelo, San Antonio, Austin, Belton, Houston, Euless, Bryan, Brenham, Sherman, Tyler, and Beaumont, to form Team ASCO.
In 2013, ASCO acquired Houston-based Hi Way Equipment Company to extend its reach across the state. ASCO can be found online at ascoeq.com.
About Children’s Miracle Network
Children’s Miracle Network Hospitals is an international non-profit organization that raises funds for children’s hospitals, medical research, and community awareness of children’s health issues. The organization raises funds for 170 participating network hospitals across North American and Canada.