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Struggles in oil country

Posted: December 28, 2016 by John G. Smith

This was supposed to be the busy season at Marvan Transport. Brian Smith has managed the fleet long enough to know that. He and his coworkers enjoyed six-figure salaries for years, hauling loads of hydraulic acid for fracking projects that tapped into previously unreachable pockets of gas and oil.

Not this year. All five trucks were parked against the fence even before Fort McMurray began to burn. The fleet slashed rates 35% and is still not securing bids. The competitors running for cheaper are only doing so because drivers are being paid a percentage of revenue rather than hourly wages. The Marvan equipment is also designed for the rugged settings of the Oil Patch – with the heavy-duty frames needed for off-road work – and the trailers are fiberglass, so it’s all too specialized and heavy to haul much else, especially in the context of spring thaw restrictions. And one customer still owes $92,000 for work completed last July.

A 59-year-old co-worker is giving up and returning to P.E.I. There just isn’t enough work to pay the rent. Others are collecting about $500 a week, doing jobs around the fleet yard in the hope that something will return. Just keeping busy. Mechanics are trying to bring in other sources of work, to keep the wrenches turning.

Marvan Transport is clearly not alone. Smith has received more job applications in the last six months than the last 15 years combined. “Any other year you’d be drooling to hire these people,” he says.

This is the first time he has ever seen Alberta fleets lay off employees in the first quarter of the year, and he has heard stories of drivers walking out because they aren’t being paid at all. His wife, Edith Torraville-Smith, who works for a training business, is also feeling the struggles. One client who had been using wages from WalMart to pay for driving lessons had to cancel her latest training session. The WalMart shifts had been slashed to two days a week. “It’s more than just the Oil Patch right now,” Smith says. “When Tim Hortons is laying off, that’s pretty much telling you something.”

Cycles are nothing new to anyone working in the resource sector. Smith has lived through three of them in more than 15 years on the job. But this one seems different. “Any of the times before, you could see when it was going to pick up,” he says. His hopes were even higher during the recession of 2007-08. “Right now, we don’t know.”

One co-worker will be crabbing in Newfoundland for the next five months, and then coming back. He has hopes. Smith himself is heading to work on a farm in Saskatchewan until June, hauling grain, feed and fertilizer. Doing anything that needs to be done, really, so he can pick up $20 per hour during 15-hour days. It’s a far cry from the wages and bonuses he enjoyed during the boom times. But the only other choice would be to dip into retirement savings, and he doesn’t want to do that until he has to.

“Just trying to make a go of it,” he says.

Go east, young man. 

A price in job losses

The challenges are not limited to small fleets.

Carl Rosenau, CEO of Rosenau Transport, began seeing freight volumes drop in December 2014. “At first I thought it would be like 2006, but we pushed our way through that,” he says, referring to the last recession. “This one’s bad. Will we ever get it back? I don’t think we will … I don’t know what people think is going to power this province now. I mean, you’ve got farming and tourism. That’s all we’ve got left.”

His fleet is finding ways to survive. Profit sharing was put on hold for the first time in more than a decade. New business has been secured by extending lanes into Vancouver and Winnipeg, and focusing more attention on the retail and food sectors. In many ways, the business is even running “flat out”, Rosenau says. But less work is being outsourced. Trailers and dock plates are now being maintained in house. This spring’s shipments could all be handled with his own trucks, too. “Now we have 100 lease operators on the phone to us every day: ‘You got work?’ Sorry.” It could mark the end for many one-truck owner-operators, he predicts.

The Mullen Group – the largest provider of specialized transportation for Western Canada’s oil and gas industry – has laid off more than 1,400 people.

All told, cheap oil has sacrificed 100,000 jobs, $60 billion in earnings and $33 billion in capital investments, with most of those losses in Alberta, says CEO Murray K. Mullen.

But the job losses hit him the hardest. Those are the “biggest human tragedy,” he said during a presentation at the recent Truck World trade show. They are the people sometimes forgotten by those who think just a few rich “oil guys” are paying the price.

The losses are not limited to Alberta, either. “We are now stuck as Canadians and we’re all paying a little bit of the price because the capital investment boom in Canada has virtually evaporated,” he said. Until the oil business dried up, the energy sector accounted for 60% of such investments. Now it barely accounts for any at all.

“We’re more balanced than we have been over the last cycle, primarily because I saw some cracks coming,” he says of Mullen Group. “We’ll survive. You’ve got to adapt.”

But how did we get here?

The shift in oil prices can largely be traced to “disruptive technology” in the form of the horizontal multistage fracturing, embraced in the U.S. to access previously unavailable oil deposits, he says. Saudi Arabia and other OPEC countries responded by boosting production as well. It’s somewhat ironic that the technique which led to cheap oil was developed in Canada.

Mullen expects the price will rebound somewhat. Today’s low costs will eventually lead to lower supplies, forcing prices higher. “The cure for low oil prices is low oil prices,” he says. But Mullen expects oil to even out at US $60 per barrel, which won’t support new investments, especially in Alberta’s Oil Sands. It costs more to pull oil from sand than directly out of a traditional well. Much of the capital available in today’s struggling economy also comes through the public sector, which he doesn’t believe will drive innovation.

There are also other “disruptive technologies” to come, the fleet executive predicts. He expects someone to develop a realistic alternative to the combustion engine, which is why we dig and drill for oil in the first place. And in his lifetime.

That might be the most disruptive technology of all. 

Everything sells

Some of those who decided to shed -equipment holdings have turned to Ritchie Bros. Auctioneers, which operates under a firm rule: Everything sells. And there is plenty on hand for the highest bidder. About 10,600 pieces of equipment moved through the company’s sprawling Edmonton complex in late April, easily setting a sales record and eclipsing the previous April’s numbers by about 35%.

Trucks dominated most of the sales on the opening day, when close to 10,000 bidders had already registered for a piece of the action. Equipment such as cranes, rock catchers, and trailers followed.

The five-day April auction is always the biggest one of the year because it aligns with the time when many resource businesses are waiting out the spring thaw and retooling for summer. As early as March, however, it became obvious that records were going to fall. This sale hit numbers normally seen during an annual Ritchie Bros. event in Orlando, Florida. Single-event numbers are still higher there, but Edmonton has six sales a year.

And once sold, much of this equipment left Canada’s famed Oil Patch in the rearview mirror. About 80% of equipment sold through the Edmonton auction remained in the province three years ago. Now Alberta buyers took home 46%.

“What we’ve seen is a lot of redistribution of assets,” says Randy Wall, president of Ritchie Bros.’ Canadian business. Trucks originally used in energy-related applications are being repurposed to haul logs, agricultural goods, and other freight. Companies in B.C., Ontario and Quebec have been some of the hungriest buyers, benefitting from the situation. And close to 13% of the sales were completed by U.S. customers leveraging the value of a strong dollar. “It’s by no means a flood like many people presume it is,” he says of the latter market. The price of oil is low there, too.

But Wall stresses that most of the sales have nothing to do with outright bankruptcies. Many of the sellers are just divesting assets to support other activities. Over the last 18 months, he has seen sellers making “rational decisions” based on the assets on hand and the projected business to come. The fleets are still there. Just smaller. “Some people use these market changes as reasons to trigger a personal decision: ‘I’ve had enough. I’m tired. I’ve made a lot of money in my last 10 years. It’s a good time to retire,'” he adds.

There will be winners and losers, just like with any swing in resource prices. Kevin Bochurka, with Eddy’s Gravel Supply in Winnipeg Beach, Manitoba, has been attending the auctions since the 1970s. This year he was in the market for pavers, rollers and service trucks, and was hoping for a deal. “Sometimes the auction brings higher prices, depending on what the economy’s like,” Bochurka observed, suggesting that a struggling oil sector might keep competing bidders at home.

Rob Luoma from Rocky Mountain House, Alberta, used the auction to prepare for the future. He and his partners left the forest products industry, but plan to shift to trucking in the next two or three years. That’s when he expects the sector to recover. “We think the pricing will be good today, and there’s lots of good equipment available,” he says. “Me, my dad and my brother used to come to these all the time.”

But some of the equipment will still roll right back into the Oil Patch where it began. Chris Loeppky, an owner-operator from Edson, Alberta, remains committed to hauling fracking fluids, even if business continues to slump. For the right price, he is still willing to upgrade his truck or even add another.

The business will return, he says. Maybe by June. “Hopefully.”

The waitress in a small hotel restaurant only minutes away from Ritchie Bros. echoes the thought, demonstrating that the pain extends beyond the trucking industry. It’s the type of restaurant most truckers would relish. The food is good. Portions big. Beer is from the bottle and cold. The only thing it seems to lack is customers.

“Slow today,” I offer, referring to the five tables that have patrons at 6 p.m. on a Monday.

“Last couple of years slow,” she says.

Maybe it will come back.

“Hopefully.”  

 

TODAY’s TRUCKING EXTRA: The big, orange spectacle 

The speed of the transactions during Ritchie Bros. Auctioneers’ record-setting auction is shocking when you consider the money changing hands. A truck rolls up the ramp as the auctioneer describes what’s on display. The bidders, resting in their orange stadium-style seats, review notes in the massive coil-bound books filled with information on every item. Others watch the action online, knowing their bids are just a click away.

Then it begins. “Boys, let’s go now,” the auctioneer says. “Who’ll give me 50?” His numbers then intermingle with the filler. “Fifty-one-ah-one-ah-one…” Bid catchers standing in front of the bay doors, between the trucks and the crowd, watch the crowd for the hand gestures.

“Yee-ah!” one of the catchers yells.

The bid climbs higher. “Don’t quit now,” the auctioneer says, egging on a bidder who begins to hesitate. The price on a screen overhead inches $1,000 higher in response. The hope is the bid will be high enough, but not too high.

It typically takes less than two minutes for the bids to finish, depending on the prices. A 2013 tri-drive International Paystar sells for $60,000. Its counterpart, with about 6,000 extra kilometers on the odometer, goes for $57,000.

Ultimately, the market prices usually prevail.

“It speaks to the psychology. Because when you’re buying something, what do you want to do as a buyer? You always want to buy cheap and negotiate your best deal. And as a seller, you always want to sell for the highest price,” says Randy Wall, president of Ritchie Bros.’ Canadian business. The buyers’ psychology takes center stage on auction day. “You want to get the maximum number of people in your facility, competing head to head with each other … You bring them in with the allure of a potential bargain.” Bargain-basement prices are admittedly few and far between, but they do happen, Wall says. “That’s what keeps people coming back.”

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