Jill Tennant
When William Shakespeare wrote, “Neither a borrower nor a lender be,” he was certainly not referring to the modern oil and gas industry. According to a study conducted by market research and consulting company MarketsandMarkets, the global oilfield equipment rental market had an estimated value of $26.8 billion in 2014.
Because rental equipment lowers industry entry and exit barriers, MarketsandMarkets states that the trend has shifted from buying to renting. Oilfield equipment suppliers and their subsidiaries, including Weatherford International, Superior Energy Services’ SPC Rentals, Halliburton’s Boots and Coots, and Schlumberger’s Thomas Oil Tools, sell and rent specialized oilfield and drilling equipment. For construction equipment, temporary power, and other rental needs, many operators turn to providers such as Warren Cat, Kirby-Smith Machinery, Yellowhouse, ASCO, and Aggreko.
Renting helps operators avoid large capital expenditures and maintenance costs, test the latest models and technologies, evaluate equipment before making a purchase, leverage the equipment knowledge of the rental company, and gain access to specialized or temporarily needed equipment. However, rentals do not build equity, do not qualify for tax advantages associated with asset ownership, and may actually surpass the purchase price in the long run. Companies should conduct a detailed financial analysis to determine whether renting or buying a particular machine is the best choice. For those who choose to rent, the following industry insider strategies can save time, money, and aggravation.
Warren Cat sells, rents, and services equipment and power generation systems to the local oil and gas industry. Photo courtesy of Warren Cat.
Strategy 1: Be a True Partner
Bryce Puckett, Texas division rental manager for Kirby-Smith Machinery, encourages rental customers to engage rental dealers as partners, rather than keeping them at arm’s length. Kirby-Smith Machinery rents, sells, and services heavy equipment and boom truck cranes to Permian Basin oil and gas companies. Puckett believes both the rental company and the customer must understand the entire project in terms of the machines needed (both type and number) as well as rental duration.
For instance, Puckett describes how several manufacturers may offer machines of the same capacity and size, yet certain ones will have definite performance advantages. His rental company’s trained personnel can help customers make these decisions. By discussing the entire project or problem upfront, customers will get exactly what they need, and often at a better price.
According to Tommy Reynolds, Vice President of Rental and Used Equipment at Warren Cat, many customers know exactly what equipment they need, while others need some guidance. Warren Cat’s application specialists can visit a customer’s site, examine the job, and ask specific questions to assist the customer with equipment selection. Warren Cat is the Caterpillar distributor in West Texas, the Panhandle, and Oklahoma. The company sells, services, and rents Caterpillar machines, engines, and trucks as well as power generation systems. Reynolds says Warren Cat works with customers both big and small, always with the goal of providing fair, competitive rates.
Often, rental customers approach the rental dealer seeking a specific piece of equipment at the lowest rate. However, David Dickert, head of Aggreko’s oil and gas unit for the Americas, believes this is the first mistake customers make: looking for a rental solution rather than a partner to help them understand the bigger picture. Although Aggreko rents generators, temperature control systems, and hydrocarbon vessels, Dickert states that, “We don’t market ourselves as a rental company. We market ourselves as a full, turn-key solutions company that really partners with the customer to ultimately find the best solution to what their issue is.”
Aggreko personnel do this by sitting down with the customer and helping solve the problems with a complete solution. According to Dickert, the first thing Aggreko personnel do is learn about the customer’s business and their challenges related to power. They listen to the customer “and think about how we can design and deploy solutions that can really impact them.” As Dickert notes, “When oil was $100 a barrel or more, the efficiencies that these applications bring may have been overlooked. But today, they really make a significant impact.”
Warren Cat has over 3,300 pieces of equipment in its rental and lease fleets. Photo courtesy of Warren Cat.
Strategy 2: Keep an Open Mind
“One of the things that we see in the marketplace today in the Permian is… a bit of reluctance to go to some new technology. Things have been done a certain way for a number of years and that is the way it is done and that is the way it continues to be done,” says Aggreko’s David Dickert.
However, as oil prices have dropped, Aggreko has spent more time educating rental customers about new technologies, including temporary power systems that use alternative fuels. Switching to alternative fuels lowers emissions, removes the number of diesel delivery trucks from the road, and extends the time between equipment maintenance periods.
However, oil producers that use diesel-powered generators may be reluctant to switch to systems powered by well gas. Producers may have had a previously unsuccessful experience or fear decreased reliability. However, Dickert notes that a shift from diesel to well gas has the ability to cut the cost of temporary power by over 50 percent.
According to Dickert, some companies have the mentality that “what we are doing today may not be the most efficient, but it is working and I don’t want to change. I understand that you can cut my cost by 50 percent right now, but there is too much risk involved with it. Our cost of production is so tight right now, I don’t want to be the one who is responsible for a massive loss in our production.” To reassure them, Aggreko can run test scenarios at one or two of the customer’s sites to prove the reliability of new applications.
For customers with multiple wells in a relatively close area, Dickert has this suggestion: “The next piece that allows for an additional 50 percent to 60 percent reduction in cost is to tie all the systems together with an overhead electrical system, just like you would with a utility. So it is a micro-grid concept.”
Having an open mind can have additional advantages. Puckett of Kirby-Smith Machinery advises rental customers to look beyond a single job when signing rental agreements. Although renters may believe the equipment will not be used long term, he nonetheless suggests they obtain a rental purchase option upfront. According to Puckett, without the agreement in place if the renter subsequently decides to purchase the equipment, as “a pure rental, they are not building any equity if not getting a rental purchase option upfront.” Furthermore, Puckett’s rule of thumb is that if a company plans to utilize the equipment for more than 70 percent of the time, purchasing it is likely the better option. Regardless of whether or not the operator eventually buys the rented machine, maintaining an open mind and having the rental purchase option in place provides much-needed flexibility.
Strategy 3: Look Beyond Rental Price
Deciding on a rental company or piece of equipment should go beyond simply comparing various rental rates. It is also important to understand the service and parts capabilities of the rental companies. Puckett advises operators to “not only consider initial rental price, but also what the price brings with it.” What is the service response time? What parts does the rental company stock? Are replacements available if the machine breaks down? How soon can the rental company replace the machine if necessary? Are the technicians qualified?
According to Dickert, some customers may think, “Well, I’ve got to lower my costs. So if I am renting equipment, what that means is I’ve got to call and get a cheaper rate.” However, he believes the right equipment supplier must, “partner and see the bigger picture. And you actually have to have the engineering and know-how to deploy the applications. Behind that, you have to have the gear and service personnel to support [the equipment] once you get it deployed.”
As far as comparing specific pieces of equipment, renters should also examine more than simply the rental rate. Customers should consider operating costs (including fuel), emissions generation, performance advantages, and maintenance requirements. Reynolds of Warren Cat uses proper dozer sizing as an example. A customer may rent a smaller dozer to save money upfront. However, this decision is shortsighted if the bigger dozer could have completed the job quicker than the undersized one.
Dickert gives the example of power generation. “Suppose you are spending about $20,000 a month with diesel fuel and rental of a diesel [generator system]. What if I can operate on the gas that the well is providing, reliably, and cut that to $10,000 a month and let’s say you have 20 sites that are like that? So now, all of a sudden, I have made a tremendous impact on the actual cost of production by significantly lowering the power cost for those sites.” Looking at the big picture, instead of focusing on rental price alone, can be highly beneficial.
Strategy 4: Limit Damage-Related Liability
Tommy Reynolds of Warren Cat reminds rental customers that equipment on a construction site operates in a dirty environment. Therefore, he emphasizes the importance of routine maintenance. Although Warren Cat performs the preventative maintenance work on its rental machines, the customer is responsible for such daily activities as blowing out radiators, changing air filters, and adding grease. He notes that grease is one of the cheapest things to buy, especially when compared to the cost of replacing a damaged moving part.
Reynolds describes how equipment operators who are new to the industry or unfamiliar with a particular piece of equipment can damage or misuse the machine. He says the experts at Warren Cat can “show them the ropes” in regards to proper equipment operation and application. For example, a customer should use the hydraulic hammer attachment, not the bucket, of a backhoe excavator to break up concrete.
Avoiding mistakes like these can save time, money, and frustration, especially since renters are responsible for damage incurred while the equipment is in their possession. Puckett thinks some operators have the perception that since the equipment is rented, they do not have to take good care of it. Misuse or neglect of rental equipment is a costly lesson to learn.
Conversely, operators should not be responsible for damage they did not cause. Puckett recommends that renters document the condition of equipment carefully. He advises that renters take photographs both when the equipment arrives on site and when it leaves their possession. Although the rental company documents the condition of the equipment on written inspection reports, Puckett is a big believer in the “picture is worth a thousand words” philosophy.
Kirby-Smith Machinery sells, rents, and services heavy equipment and boom truck cranes. Photo courtesy of Kirby-Smith Machinery.
Strategy 5: Avoid Extra and Unexpected Costs
Renters must either provide their own insurance coverage or agree to a loss damage waiver. According to Puckett, many renters do not realize that the loss damage waiver, which typically costs about 14 percent of the rental amount, can surpass the cost of insurance coverage. Renters should analyze whether obtaining coverage from their own insurance providers is less expensive than the fees associated with the loss damage waiver.
Another way to save money is by refueling equipment before returning it. As with rental cars, having the dealer refill it is more expensive than doing it yourself. According to Puckett, it is “typically 50 percent higher to refill at the branch versus at your location before it goes back.”
Read the agreements for refill and other charges. Although daily or monthly equipment rental agreements (like those Warren Cat and Kirby-Smith Machinery offer) typically do not include early termination fees, be sure to read the documents and understand the customer responsibilities and expectations. Last minute surprises are never good.
By following the advice of these insider experts, the equipment rental process can be smooth and cost-effective. With good communication and partnerships, customers can get the flexibility and solutions they want at the price they expect. Savvy rental customers can demonstrate that William Shakespeare’s borrowing and lending advice was wrong, at least as applied to the modern oil and gas industry.
Jill Tennant is a Texas-based writer and researcher. Her oil and gas industry articles have appeared in Permian Basin Oil & Gas, World Oil, oilandgasinvestor.com, and Woman Engineer. She can be contacted at tennant.email@verizon.net.