Manufacturers Face New Threat From Fracking Slump

Drilling decline means lower sales of machinery, engines and pipe

U.S.—known as the drilling-rig count—fell by 20% in October from last year, hitting a
two-year low. Heartland Enterprises Ltd., a machining company based in Texas, has seen sales to
energy producers fall 20% this year. Jay Mallinckrodt, vice president of business
development, said he is concerned that the slide will continue into 2020 and is
trying to limit Heartland’s dependency on drilling by expanding sales of machined
metal parts to manufacturers in the aerospace industry.

“It’s going to be up and down, and you just got to be somewhat prepared for that and
not get too exposed,” he said in an interview.
The energy slowdown is adding strain on a manufacturing sector that is also
contending with lower global trade and new tariff costs. Factory output is down 2.2%
this year through October from a recent peak at the end of last year, according to the
Federal Reserve.

Low oil and gas prices used to buoy manufacturers for two reasons: They heralded
lower input and transportation costs, and encouraged consumers to spend more on
cars, trucks and construction equipment.
The domestic energy boom has changed that equation. Now low prices also mean lower
demand from energy companies. Natural-gas prices are down sharply, and oil prices
have hovered around $60 a barrel for much of the year after reaching $74 in 2018.
Investors are putting more pressure on fracking companies to focus on profitability
over rapid growth.

As a result, drilling and service companies are retreating from oil fields, storing or
scrapping unused equipment, and turning in rented gear in anticipation of a prolonged
spell of inactivity. That is hurting manufacturers that sell them equipment and
materials.

Kennametal Inc., which makes fracking-drill bits, this month reported a 20% decline in
quarterly sales to energy markets from a year ago. Schlumberger Ltd. and Halliburton
Co. , major manufacturers and service providers, both reported downturns in their
energy-dependent U.S. businesses in the latest quarter, and their shares have fallen
more than a quarter over the last 12 months. Machinery giant Caterpillar Inc. and
Allison Transmission Holdings Inc. also reported downturns.

Will Perry, chief executive of Worldwide Power Products LLC, a Houston-based
distributor of engines for generating electricity at well sites, estimated sales of that
equipment are down about 25% nationally this year.

“We’re going to see a lot of distress in the energy-sector with equipment,” he said.
The falling rig count also has choked demand for steel pipe for drilling and casing
inside those wells. The U.S. average price for a ton of well-site pipe is down 17% from a
year ago, according to market consultant Pipe Logix.

The oil-and-gas industry bought $48 billion of manufactured products in 2018.
United States Steel Corp. in the third quarter logged a loss of $25 million in its unit that
makes pipe for drillers, after recording a $7 million profit in the same quarter last year.
Net sales of pipe products fell 17% in the quarter from last year.
Some companies have worked to scale back exposure to volatile energy markets. United
Rentals Inc. said rentals of equipment to drillers and producers made up about 4% of
annual revenue in the third quarter, compared with around 12% in the third quarter of
2014.

“We just won’t chase business there because the highs feel great and the lows feel
worse,” said Ted Grace, head of investor relations.
Others have sold off businesses focused on sales to energy producers. Cleaning-supply
company Ecolab Inc. said earlier this year that it would spin off its business making
chemicals for the oil industry. Harsco Corp. sold a business processing natural gas in
July.

Kyle Ramachandran, president and financial chief at Solaris Oilfield Infrastructure Inc.,
which makes sand containers for fracking companies, said rentals of that equipment
have softened as frackers focus more on margins than growth.
“Now they’re getting rewarded for profitability and cash flow,” he said. “So that means
a little less activity.

Nov. 18, 2019 821 am ET
By Austen Hufford and Bob Tita