The tides of the drilling mud industry have an ebb and flow all their own.
By Shanti Terry
Much like the ocean, the oil and gas industry is both wonderful and majestic to behold. It’s to be appreciated, but also respected, as unexpected riptides can sweep one far away from shore if caution is not exercised. The waves of the market can come gently, as on the shore, delicately washing sand over one’s feet, or they can come as powerful as a tsunami, desolating everything in their wake. One part of the industry that seems to understand this particularly well is part that we know as Drilling Mud.
In speaking with seasoned drilling mud pros around the Permian Basin, we found that learning to ride the waves of the marketplace is possible if one knows what to expect. The way to know what to expect is to have a large amount of experience, and each of our pros has had plenty. With over 30 years of experience, Ken Goldsmith is founder of Mudsmith, a drilling fluids company serving the Permian Basin and surrounding areas of West Texas. Chris Snider is the Permian Operations Manager for Horizon Mud, a nationwide drilling fluids company based out of the Permian Basin. Snider has been in drilling mud for over eight years. Carlton Crownover has worked in drilling mud since 1980. He started his company, Permian Fluids, in 2010 and has been serving the Permian Basin’s drilling fluids needs ever since.
We spoke with these pros about times when the market drops and one must either sink or swim, and found that swimming is based on three main skills:
1) A thorough understanding of why the waves of the market are rising or falling at the time
2) The ability to recognize and adapt accordingly to the effects that market waves bring about
3) Dedication to developing strategies that will allow for subsistence as storms come and go
Understanding the Market:
Why the Bust?
You might not know it, but professional surfers often research and study the various waves they intend to conquer in competitions or those they’ll surf just for fun. Like them, our drilling mud pros watch, research, and study the market, observing its ebbs and flows. Based on their understandings, the reasons for the market bust this time around can be attributed to the following:
1) Market saturation
2) Political agendas
According to Ken Goldsmith, it was not the high costs of oilfield products and services that caused the recent drop in oil price. He feels that the reason is as simple as supply exceeding demand. “When supply exceeds demand, price drops,” said Goldsmith. “If the cost of products and services had been about 25-30 percent less, oil prices might have crashed a year ago. Why? Because more wells would’ve been drilled, and the over-supply would’ve occurred earlier.”
Goldsmith is certainly not alone in his line of thinking, as Carlton Crownover shared in the idea, stating that the amount of oil circulating at the moment is causing issues. “There’s a huge glut of oil on the market in the world because we are still just now coming out of a recession. Industries in Europe and even here have never really started back up,” said Crownover. “There’s not a big need for energy right now for manufacturing. Hence, you see a lot of unemployment in Europe and here and other places. Our demand for energy is just not as high as it used to be.”
Crownover went on to say that riding the waves is just the price that has to be paid for participating in the market. “At the end of the day, oil and gas are still publicly traded commodities worldwide, and we’re not going to see our government step in and try to control prices, because we’re not going to unionize business. We’re going to be part of the free market, and we’re going to go up and down with the market.”
In addition to saturation, Crownover shared a few interesting thoughts on political reasons for the market drop. In his opinion, many of the issues being experienced of late can be attributed to problems in the Middle East, particularly with Saudi Arabia and Iran. “The Saudis have a vested interest in making sure that Iran doesn’t become too powerful, and that the Soviet Union doesn’t become too powerful. Also, they obviously don’t want the United States to become oil-independent,” said Crownover.
As Saudi Arabia is the world’s largest producer of crude oil, it’s obviously safe to say that they have a huge influence on prices. That being the case, it seems Crownover is correct in thinking that their agenda is a driving force behind the market’s recent fall. When asked about the reasons for their wanting to control the market, he shared the following: “They have some problems right around their own neighborhood right now that they are trying address any way they can, and that’s with dollars. If they can bring the price of oil down low and keep it down low for a year or two, they can put some other countries in such a financial burden that they won’t have time to focus on dethroning the Saudi empire. Those countries will be too worried about feeding their own people.”
Snider’s understanding of the market took a different approach from Crownover and Goldsmith. Rather than discussing market saturation or political issues, Snider told us that he feels the reason for the market drop is fluctuation. “The underlying theme I keep hearing is that if barrels could be stabilized at around $50, we could set up a budget which could put up more rigs,” said Snider. “No one is setting their budgets right now. All these oil companies are running off their 2014 budgets, so that leaves no room for drilling at the current time.”
Effects of the Market
Just as the moon has profound effects on the tides of the ocean, market conditions have effects on business for the oil and gas industry. Some of the effects are pros and some are cons. We asked our drilling mud pros to weigh in on the specific ways they feel the effects of the market when things take a dive. The list of cons was longer than the pros, but still, there were a bit of both.
All three of our pros acknowledged marginal adjustments as a source for discomfort during low points of the market.
Prices were the first area for adjustments mentioned by both Crownover and Snider. As things slow down in the market, negotiations must take place between companies and vendors from a couple of different angles. Firstly, drilling mud companies start negotiations with their vendors to get lower prices for products and services they need to continue operations. Likewise, as drilling mud companies are vendors themselves, they are also asked for price cuts from their customers.
Crownover said he got ahead of the curve this year, shocking a few vendors by starting negotiations early. “We’ve been meeting with our vendors negotiating prices for some time now. The first few times I called and asked about getting lower prices, a few of them laughed and said they weren’t lowering them. Within a month they called back and they worked with us because they realized this bust was really going.”
Snider said, “We start getting asked for huge price cuts. We’ll have oil companies telling us that they’re making 30 percent less profit than they were, so they expect us (their vendors) to drop our price by 30 percent or up to 50 percent.”
Snider went into further detail explaining how things go when negotiating with vendors. He pointed out that, concerning supplies, drilling mud is not the only industry that uses certain raw materials. As a result, sometimes their vendors will go up in prices as the oil and gas market goes down. “Take salt gel for example,” said Snider. “We’ll ask our salt gel vendor how they’re going up in price with the market drops, and they tell us that we don’t have to buy it if we don’t like the price. They say the oil and gas industry is a very small part of what they do. Other industries, such as glass making and paint use quite a bit of the raw materials in salt gel, more than we do, so the price won’t be dropped. They can just increase their market share in other industries if we don’t buy it.”
Apparently, negotiating can be tough work, but it has to be done, and seasoned pros know to “get after it” when the time comes.
Another area where marginal adjustments are made is in the area of staff, meaning cuts in the amount of employees a company can keep. Depending on the size of the company, cuts in salaries and benefits can be enough to level things out so that more employees can stay on. However, sometimes that’s just not an option.
Snider said, “When your margins, what you’re making, drops, you have to lower the amount of employees you have, corporate-wide. When we were a smaller company, we had fewer employees, so we could take cuts in salaries and benefits. We’ve done those sorts of things, but once you reach a certain level, that’s not enough anymore. You have to make cuts. You still have to balance your sheet at the end of the day.”
Budgets adjustments are also made as a direct effect of a dropping market. Carlton Crownover shared that trimming spending back is a necessity during low points. “Employees’ entertainment budgets get cut as much as 90 percent. We usually go out to lunch in groups through the week, and it comes out of the company budget, but that stopped on February 15th. That’s how you get through it. The company stops providing all the little frivolities.”
After learning about the cons, it might not seem like there could be any positive effects from the market when it’s not on the rise. However, both Goldsmith and Snider had silver linings tucked away for us, as they shared things to be glad about during a drop.
“Employee loyalty and retention is better since oil prices have dropped,” said Goldsmith. “Employees appreciate their jobs more this year, and employers appreciate their customers more. We’re operating more efficiently on thinner profit margins, but we’re still working every day, preparing for the next boom. So, arrogance is out in 2015 and humility is in. It’s not all bad.”
Snider chimed in, expressing hopefulness for the future, regardless of current conditions. “Have we lost rigs to competitors with everything that’s going on? Yes. We’ve lost some and we’ve picked some up. We’ve picked up more from our competitors than we’ve lost. Yes, we’ve had a decrease in our rig count, but looking at the numbers, there are 33 percent less rigs running today than there were two months ago in general. That number will go back up. It’s not a great market at the moment but it will come back.”
Riptides: Strategies for Survival
Even if you don’t know much about the ocean, you’ve likely heard that riptides can be dangerous. They can pull you under if they’re strong enough, and they will most certainly pull you far away from the shore. If you happen to find yourself caught in one, knowing the strategy for handling the situation is the difference between life and death. Four steps could save your life:
1) Don’t panic.
2) Get noticed. If you can, alert someone that you are drifting out so they can get help.
3) Conserve your energy. Don’t swim against the current. Float and tread water. Most people who die from riptides drown by tiring themselves out.
4) Remember to think outside of the box. It might seem like you should swim directly to shore, but swimming parallel to it is a much better idea. Swimming parallel to the shore will eventually get you out of the current.
Strategies for survival are essential for numerous situations in life, and the drilling mud industry is no different. We found that whether you’re talking about the ocean or the oil and gas market, a riptide is a riptide, as the steps for survival are essentially the same.
1) Don’t Panic! Recession-Proof Your Company
According to Ken Goldsmith, taking precautions before a bust will enable a company to avoid panic when things go awry. Goldsmith shared that his company grew during the bust of 2009, and they plan to grow during this bust too. He explained that making one’s company recession-proof is key. “Everyone I’ve hired and trained in the past five years have only seen up, up, up. They’ve never seen down. Big egos are being smashed. Humility is, or should be, the new attitude. This stern reminder will make better people and better companies out of those who pay attention, learn, and make adjustments to recession-proof their businesses. For example, operate debt free if possible. If that isn’t possible, keep your debt-to-income ratio as low as possible. Don’t overstaff too much in the upturn. Avoid products, people, or methods that are only profitable when oil is above $65-70/bbl.”
2) Get Noticed
All three of our pros had things about their companies that were attention grabbing, with advanced technology and methods that truly cater to caring for every client’s needs.
Crownover discussed the data tests his company can provide via their lab for clients before a drilling fluid is decided upon. He said the data they can provide is extremely accurate and thorough, allowing for true efficiency. “We have the capability to analyze rock formations we are working on in real time. Usually, it can take anywhere between a week and a month to get results back, but we can test and have an analysis completed within 24 to 48 hours because we do it in house.”
Meanwhile, Snider mentioned that Horizon Mud Company has experienced engineers that are unrivalled and the company’s service is consistent. Concerning technology and equipment, Snider said, “We also have technology that no one else has. We have the Clear Fluids system, and we’ve recently acquired Monster Mud Pits, which is a pre-mixed pit system, so now we don’t have to go to our competitors to get pre mix pits. We also bought Mud Masters, who have created some of the industry standard products like the original drill beads. Because of that competitive edge with our products, we’re able to do things in the industry that others can’t right now.”
Goldsmith finished up the “pro” pronouncements, sharing about his Pitless Pad Drilling Fluid System. “30 years ago, I set forth on a mission to build the cleanest, safest, fastest, and simplest, or most efficient mud system. Eventually, we evolved from horizontal, rectangular, open topped pits, to vertical, round, cone bottomed, closed top tanks. Our tanks take advantage of the optimized use of gravity. Mud is simply a mixture of solids and liquids, and gravity insists that solids fall downward. Thus, vertical, round, cone bottomed tanks are more efficient. Since our tanks are symmetrical, they can be manifolded together in a series and with the addition of a few solids control tanks, a complete horizontal rig pit system can be replaced. It can eliminate the need for huge open-topped earthen reserve pits.”
3) Conserve Your Energy
As for Carlton Crownover, he said that Permian Fluids will be conserving their energy during this downswing. “Growth for our company has been stopped. We’re not going to buy any equipment, we’re not going to put any mud plants in, and we’re not going to put in any satellite offices. We’re not going to try to grow our company, period. We’re going to try to maintain a level that will sustain our business, and that’s it. That’s our goal. We’re going to keep our doors open for the next 16 months. The prognosticators that I’ve heard before that are usually right are predicting an 18-month bust, which began in or around January.”
4) Think Outside of the Box
According to Chris Snider, Horizon Mud is not limiting itself to the traditional ways it’s generated income in the past. The company has been branching out as a way of ensuring their survival. “You have to get creative with thinking of other ways to generate revenue. We’re branching out into areas we haven’t done in the past. Shaker screens are a good example. We’ve never really gotten into equipment as much as we have recently. We’ve bought a couple companies that had equipment, so we’ve branched out in that way, too, as a means of approaching the market in a different way so that we can retain more of our employees.”
So there we have it. Our pros demonstrated the drilling mud industry’s capacity for understanding the market, adapting to the market, and strategizing survival in the market. However the tides change, the drilling industry is vital, and it will stand should the waves crash over it or pull it under.
Shanti Terry has been a freelance writer/blogger since 2011. She can be reached via email at: email@example.com.