Analysis: US compounder plugging gaps after oil-market plunge

Akron, Ohio - During 2013 and 2014, things were going so well in the oil and gas business that custom compounder Pinnacle Elastomeric Technology decided to add more capacity.

More than half of its business was tied to oil and gas, its plant in Lula, Georgia, was operating 50-plus hours per week, and the business was close to capacity, working on open mills, according to president Bob Rathbun. After all, from 2012 to the end of 2014, the number of oil rigs drilling for oil in the US had doubled from 800 to 1,600.

So Pinnacle made the investment to add an internal mixer, a 55-liter TMP tilt-body mixing line with state-of-the-art controls. The firm focuses on high-end compounds such as fluoroelastomers, HNBR and Aflas, materials Rathbun said are perfectly suited for the wide array of rubber products that are used in down-hole oilfield applications.

But as the price of oil plunged, so did the fortunes of Pinnacle's customers that made their living supplying those oilfield service components. Just as Pinnacle was bringing its new capacity online, the number of rigs operating in the US plunged, dropping roughly 75 percent to its current level of about 400.

“I'll tell you, as long as I've been in this industry, if you want to predict a downturn, just install capacity,” said Rathbun, a longtime industry veteran. “I've seen it so often in the tire business and other places.”

Scott Kearns, R.D. Abbott Co. Inc. vice president of sales and commercial development, said the suddenness of the market's decline caught many firms off-guard.

“With oil and gas, it was more like it was a cliff,” he said. “You're plugging away and then the cliff came, and things just stopped.”

About 25 percent of R.D. Abbott's business comes from oil and gas, and Kearns said customers of the distributor of materials and other services to the rubber industry were building inventory and hiring new staff.

“They were investing, and it really hit a lot of folks with great surprise,” he said. “That almost makes it much worse; it wasn't really predictable. And companies were in an investment posture. They were preparing for future growth and future demand.”

Tougher on customers

Pinnacle and R.D. Abbott each felt the impact of the quick decline in oil and gas, which also includes a major drop in fracking for natural gas.

Pinnacle's oilfield sales for 2015 were half the level of 2014, “and that's without losing a single customer,” Rathbun said, noting it has not laid off any of its 15 employees. “We're keeping it all together with hopes that our growth strategy will continue to add some business in 2016. We've got a good team, and we're really trying to keep everybody onboard and together.”

For R.D. Abbott, the decline in oil and gas was about 40 percent for last year, Kearns said, with polymers such as nitrile, HNBR and fluoroelastomers hit the hardest. “We haven't had to do any layoffs,” he said. “As a full-service distributor, we're pretty diversified.”

He said the Cerritos, California-based firm derives the rest of its revenue from a number of other major markets, including health care, automotive, aerospace, transportation and general industrial. “It's tough, but it's not creating a significant impact on our business.”

Both suppliers said the downturn has been much tougher on customers.

Rathbun said some Pinnacle customers are tied 100-percent to oil, with many, if not most, with 70-90 percent of business tied to oilfield services. Some have laid off as much as 60 percent of their work forces, and many are cutting back weekly hours for staff.

Others have sent Pinnacle letters from their customers seeking cost reductions of 25-35 percent, hoping Pinnacle could help them in some way.

“The only thing we're able to do is take our margins, our profits and pass it on up the food chain,” Rathbun said. “And surprising, a lot of our customers are really pushing back hard on these requests for reduction because of the inelastic nature of the business.”

And in the end, it's the price of oil driving the downturn in the sector, not the price of the raw materials or parts going down-hole, he said. Pinnacle has tried to be creative in some ways to help its partners deal with the pressure.

“It's still a competitive landscape out there,” Rathbun said. “When our customers say they're going to lose this if they don't at least do something, we're in a partnership with them so we do whatever we can. Sometimes if we don't have anywhere to go on tightly certified compounds, maybe there's another compound we can work on and drive some costs down in another area.”

Kearns said some of R.D. Abbott's customers have reported sales dips of 50 percent or more in oil and gas revenues, with lay-offs at various locations, though the job cuts mostly came last year.

“It certainly affects projects when you're working with those that are development materials for oil and gas,” he said. “A lot of the development time has been shifted from higher temperature, higher pressure applications to more cost-savings types of projects.”

Bridging the gap

Pinnacle is looking to offset the drop in its oil and gas business with several initiatives.

First, the new capacity the mixer installed was in hopes of targeting some higher-volume type customers, such as in automotive and heavy equipment.

“We've been able to pick up a few of those,” Rathbun said. “We've seen some growth in the OEM market, in small engines and appliances—things that take high-end type rubber.”

Playing in some of those markets, though, is different than oil and gas, he said, where there is much camaraderie and “mom and pop” type companies.

“When you go to start wanting to try to gain a foothold in automotive and heavy equipment, it's much more difficult to get to the right people,” he said. “They're not as accessible. So we're picking away at trying to get into those larger-volume markets.”

Pinnacle, though, will continue to be persistent in trying to find new customers in these areas. “But we'll keep in contact with our good old friends in the oil business to be there when things come back and kind of hold their hands through all this downturn,” Rathbun said.

The mixer also is taking advantage of the lull to work on some development projects and gaining some certifications that will help it when the oil business perks back up. “Even in the oil sector, we're doing a lot of technical work, development work for new customers, new quotes and meeting specifications for new customers,” he said.

Effort will be made to get compounds approved to NORSOK standards that focus on safety in the petroleum industry and NACE guidelines for corrosion protection. “It's something that we were up against when things were booming,” the Pinnacle president said.

“Now we're putting more of an emphasis on it, and it's going to be there when the industry comes back.”

When better days return largely is tied to the price of oil. Rathbun cited industry data that in January put the total cost to produce one barrel of crude at just more than $36, much higher than Middle East costs of $8.50 to $10.70 a barrel, but slightly below current oil prices.

Kearns said many in the sector look at the oil price in the $40 range as being the break-even point where prices higher than that begin to make it economically feasible to drill for U.S. oil. He said most customers seem to think the sector has bottomed out, but it's hard to forecast when better times will return.

“From what we see today, it's levelled off, and we're in the valley and most people are expecting a generally flat 2016,” the R.D. Abbott official said.

“So most people feel we've hit where we're going to sit for the next year. There's not really optimism, but there's not really pessimism. I think it's going to be business as usual this year.”