“Supply Side” Economics: How Supply Houses See This Marketplace

Justin Lowe sits at his desk in his office just past the merchandise floorspace of WB Supply, an oilfield supply house in busy Chickasha, Okla., and smiles as he relates the best things about being a supplier to the oilfield, even in these changeable and not-exactly-booming times.

Justin Lowe, WB Supply, Chickasha, Oklahoma

“Right now, they can’t build pipelines fast enough,” Lowe said, observing that Oklahoma, with its Cushing hub, is Pipeline Central for much of the interior of the nation. And the buildout of midstream infrastructure—which is going gangbusters in basically all of the nation’s shale plays—is just as frenetic here as anywhere else. This buildout gives companies like WB Supply an added marketplace for their wares. Drilling is stable but not increasing in this area, which lies near the juncture of the SCOOP and STACK plays, and ongoing field production needs are fairly steady at least, so both of those sectors are steady for WB as well. But midstream has been the niche that has taken up whatever slack might otherwise have existed.

For this report, we took a swing through Southwest and Central Oklahoma, visiting a handful of supply houses to see what they could report about their current levels of activities and the changes they see around them. Supply houses, as a niche, are a good barometer or bellwether of the local oil and gas industry on the whole.

What we found was a marketplace that is somewhat retrenched, due to some market uncertainties and shifts, but one that has some bright spots (such as the aforementioned midstream effect). This marketplace also is seeing considerable change as operators have slowed their pace a bit. Supply stores themselves, meanwhile, have felt a pinch as some of their customers have bypassed them, going straight to manufacturers for supplies and equipment. That trend concerns them.

Lowe is manager of this facility, which is one of the strongest performers among the 22 locations operated by WB Supply, whose markets include Texas, Kansas, Colorado, New Mexico, and North Dakota, as well as Oklahoma.

A supply house looks, to the casual observer, something like a cross between an auto parts store—it has that heavy-on-hardware look about it—and a yard for an equipment dealer. There is a store portion housed indoors, and most of these facilities have a sizeable yard out back where the heavier objects reside. One of the sites we visited had workover units parked in its yard. Most of the sites were brimming with pumps, pipes, fittings, valves, and—for their pumping unit customers—the whole array of pumpjack parts.

Oilfield Supply Houses - Outside and In

Lowe credits the shale play that his store services as being the main reason why his outlet is doing better than average within his chain. Revenues have been increasing for every month of the past year

He smiles, too, at the thought of a supply house being an indicator of the health of the oilfield.  “We’re kinda looked upon as the stepchildren of the oilfields,” he said with amusement. Not that he agrees with that assessment.

“That’s the way some have looked at it. We might be ‘just a supply house,’ but nobody could survive without us.”

Getting Bypassed

In Oklahoma City, at Braselton & Co., manager Dustin Anderson likely would concur with Lowe about the essential role provided by any supply house. And it’s because he sees the pivotal position that these outlets provide that Anderson deplores the latest difficulty to beset them, which is the trend of end-users bypassing these middlemen to buy direct from manufacturers.

Braselton & Co. is not a supply house, per se. They are a wholesaler who supplies the supply houses. But that still puts them in the same marketplace, facing the same challenges. And the challenges are significant.

“The rigs nowadays are going more direct,” Anderson said. “They’re cutting most of the middle men out. It’s hurting our industry tremendously. For our own part, we [Braselton] have never sold direct to any [E&Ps]. We only sell to our supply stores, because our supply stores are selling directly to Patterson UTI, and H&P, and Devon, and companies like that, so we don’t want to step on their toes.”

Braselton & Co Inc., Oklahoma City

But increasingly, operators are going straight to the manufacturer. “It cuts me out,” Anderson said, noting that he can’t be competitive because even if he wanted to match the price fixed by the manufacturer, he can’t, because, with zero markup, there’s zero profit for him. “I can’t mark it up any and sell it to them [end-users] when they’re getting it at the same price I’m getting it for.”

Anderson was aware that this phenomenon has unfolded in other industries as well, from time to time. In traditional consumer retail, for instance, there have always been manufacturers who have toyed with the practice of selling at prices that undercut their retail distributors. But such practices generally have been frowned on by the retail element, and in many cases have backfired on the wholesalers and manufacturers who have misused their marketplace partners.

Anderson said that Braselton does business in such product lines as mud pump expendables, swivel parts, float valves, drill pipe screens, rings, gaskets, gate valves, and the like. “We’re also a Jet-Lube distributor,” he said.

Asked if he would liken what is going on in this upheaval between manufacturers and middlemen with Amazon.com’s usurping of the brick-and-mortar retail trade, Anderson had an emphatic yes. His partners, too—the supply houses that he supplies—feel likewise.

The danger for a market when a maker decides to bypass a distribution network is the risk that the distribution network itself will shrink. That doesn’t pose a problem for the maker, necessarily, but it does pose a problem for the end-user community when the retail outlets dry up or disappear and the direct-selling maker is then the only game in town. At such times, customer service can itself be compromised.

WB Supply’s Lowe, back in Chickasha, said he had encountered the same phenomenon of direct sales in his own marketplace.

“It does happen,” Lowe said. “It happens and, even though the manufacturer may go direct to the end-user, most of them [end-users], not all of them, but most of them will say, ‘Hey, you need to run it through the supply house of your choice.’”

“If they [direct sellers] go to that end-user, then [eventually] they’ve lost us and our 200 customers. Versus a situation where they gain one end user [but lose a chain of supply houses as a partner]. Because if they did that enough, we wouldn’t want to use them anymore.”

Finding Opportunities

Another Oklahoma City-based supplier, Oilfield Specialty Distributors Inc. (OSD), is similar to Braselton & Co. in the sense that its own customers are supply houses themselves, not end users. Phil Mock, Sales and Operations Manager for OSD, spoke with the SCOOP STACK Journal about activity in this region and the changes he sees.

Like WB Supply, OSD has found that it can sell midstream supplies to its partners.

Oilfield Specialty Distributors, Oklahoma City

“We’ve found some products we can sell in that midstream market,” Mock said. “With midstream developers bringing in so many of these pipelines, there is opportunity there. We’re always looking for opportunity and in that respect we’re in the same boat as everyone else. Fortunately, our little company has been around since 1951. It doesn’t look anything like it did back in 1951. And in fact it doesn’t look a lot like it did even 10 years ago. But everybody is constantly having to change with the times and figure out where the opportunities are because there are always opportunities.”

Recently, OSD picked up a product line from NOV (National Oilwell Varco). “They make closures. Pipeline closures,” Mock said. “It’s a company I used to represent and I used to work for. Back then it was called JM Huber Corporation. We’ve been fortunate to represent this line and to sell closures to the midstream. You just always have to look for opportunity and try to figure out how we can morph into an [entity] that can service those markets.”

Mock said OSD has been rather conservative in its approaches and that it has been a survivor, precisely because of that conservatism. Lately, they’ve found a survival mechanism in maintenance products. “We represent Gates Rubber Company. It’s belts and it’s holes and it’s day-to-day maintenance stuff. You still have all these stripper wells out here, which are still producing. That’s the heart of our business.”

Summit, Still Standing

Summit Supply is a stand-alone operation, like Braselton and Oilfield Specialty Distributors, and unlike WB Supply, which is a chain. Summit has been in operation here on S.E. 25th Street for about 25 years.

Unlike Braselton, Summit does sell to the E&Ps and the operators in the field. George Barnes, manager at Summit, acknowledged many of the same challenges the others cited.

“Through the years, we’ve always had the up and downs in the oil and gas industry. It’s just that you’d like to have [just] the shallow up and downs and not the deep, sharp ups and downs,” he said with a smile.

Horizontal drilling has altered the landscape in Oklahoma, Barnes said, echoing a observation that Mock made as well. Said Barnes: “Horizontal drilling is probably about 90 percent of the drilling activity now in the state.”

George Barnes, VP of Operations, Summit Supply

There are no big secrets to success. “It’s tough,” Barnes said. “You just have to have a good customer base and treat people well and give the people a good product for a fair price.

Like some of the others, he has felt the impact of the manufacturers who do the direct selling.

“No, we don’t like it, but what can you do about it?” he said. “It’s kinda like, we got them started by helping them build their business and then—all of a sudden—they were quoting the end user the same price as they were quoting supply stores. So, the end user is just going to go direct rather than going through the supply store.”

Still, if the supply house has enough selection, and if the supply house is strategic in its choices, it is bound to have some products that won’t be affected by the direct-sell phenomenon.

Industry Observer

Bobby Partin is owner/manager of OKY Investments, (with the greatest website domain name ever – theoilpatch.com) which maintains offices and a yard in the 1600 block of S.E. 25th Street, like a number of other suppliers and service outfits in this city.

OKY Investments is not a supply store or chain. Whereas those entities sell new manufactured goods, OKY deals almost exclusively in used and/or rebuilt or refurbished equipment.

Just the same, Partin sees much of the same business cycles and ripples that the supply house businessmen encounter.

“We supply reconditioned equipment,” Partin said. “And pumping units. Pumping units and gas engines are 95 percent of our business.”

He’s mere blocks from most of the people interviewed for this article. This is Oil Row.

Bobby Partin, OKY Investments, Oklahoma

A veteran of the patch, Partin has seen it all. These times are not the best of times that he’s seen, but he’s philosophical about it all and is always working on the next adjustment, the next change, in an industry that throws changes around like penny candy strewn at a street parade.

“The nature of our business has changed drastically with all of the new shale plays and the horizontal wells, and the monstrous fracs they’re doing,” Partin said. “The amount of fluid these wells are producing initially, especially here, is huge. Too much for pumps to move. So, while the rod lift part of it used to be one of our primary first options of artificial lift, well, now it’s down to third or fourth in the order at least. You’ve got gas lift, you’ve got electric submersible pumps, you’ve got jet pumps, plunger lift, and then as the well declines to different levels, they’ll put it on rod pump. Soooner or later, almost every well is going to end up on a pumping unit, but it may be quite a while.”

“A lot of these wells are going to flow for some time. Maybe several years, or until the gas that’s in the formation is no longer sufficient to lift the fluid out of the well bore. And that’s where the artificial lift comes in. If a well is naturally flowing, then it just flows. But once you have to help it, with artificial lift, that’s where all of us come in with different kinds of artificial lift.”

Part of this change was precipitated by just the sheer sizes of the wells and the volumes of fluids that were being displaced. A gas lift well is, as already observed, a higher volume well than a pumping unit well.

“It’s moving a lot more fluid,” Partin said of gas lift. “It involves a compressor running gas down the outside of the annulus, and back up the tubing in different ports, and [in that fashion] you can move a lot. And then of course, the ESP’s, the electric submersible pumps, those are electric-driven downhole motors, and they can remove a ton of fluid.”

But they can also be higher maintenance.

“Higher maintenance, yes, and big electricity cost, things like that. But they’ve got benefits. If you have to move that much fluid, you’re going to have a tough time doing it with a pump jack.”

Partin buys units all across the country, then sells them in Oklahoma, Texas, Kansas, and Illinois. “We bring it here, rebuild it, and resell it with warranty, and then we package it with whatever power they want.”

Asked what he thinks are the unique challenges faced by the supply houses, Partin said the situation depends on what particular product lines they are in.

“If they’re involved in the drilling end of it, they’re probably booming,” he said. “They should be. And there are other markets that are doing good. I have a friend right down the street that’s really big in service production equipment—the tank batteries and all of that—and he’s been booming for several years now. I mean, going crazy. It’s Allstates Production Company. Scott Lee. Right down here on 29th. Good guy and got a great business. And then some of the workover crew companies, some of them are doing pretty good because they can diversify. They can plug, they can re-complete, they can do a lot of things.

“I’ve got several industrial properties around here, like the property right across the street, which I rent to a company out of Texas that provides all kinds of different rental things for drilling locations: light towers, port-a-potties, trash services. They’re really doing a good business. Another company I lease [real estate] property to here is also out of Texas, and they provide all kinds of matting and stuff that goes on these drilling locations to contain oil leaks and spills and stuff like that. So they’re kind of booming. So it just depends on whatever [niche] they’re in. But I can just say that, as with almost anybody in my part of the industry—the rod lift and artificial lift end of it—I’d say they are not having a lot of fun.”

Asked if the supply houses who are heavy into rod pumping equipment are likely similarly affected, Partin said yes.

“That’s the thing,” he said. “I’ve always said that one issue in my business is [the fact that] any guy with a telephone and a pickup truck is in the pumping business. He can find a pumping unit and try to broker it—because there’s so much excess equipment still out there. A lot of these small guys who are customers are willing to accept just a field-run piece of equipment, just on sight. So you have that competition too.”

He paused, then added:

“We’re hanging in there.”

Next month we conclude with Part 2, “Supply Houses: Looking Back and Looking Ahead.”

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