The COVID-19 pandemic and the concurrent volatility in the energy commodities market has increased uncertainty in the oil and gas pipeline industry. With budgets tightening among operators, contractors, service providers and other segments of the industry, rental and leasing companies offer flexible financing options to fulfill equipment and supply needs.
Renting or leasing equipment offers a number of potential benefits, from customized agreements and improved expense planning to keeping up to date with technology and managing equipment obsolescence, according to Ralph Petta, president and CEO of the Equipment Leasing and Finance Association (ELFA), a trade association with more than 575 member companies representing financial services companies and manufacturers.
“There’s a reason nearly eight out of 10 companies lease or finance their equipment,” Petta says. “It makes good business sense.”
During this current downturn, rental and leasing companies offer pipeline companies room to maneuver their finances, says Steve Tschepl, Gulf District manager (Trench Safety) at United Rentals, which supports the pipeline industry with trench safety solutions including equipment, engineering, training and jobsite support.
“With most companies struggling to preserve cash through a downturn, renting is an increasingly attractive option vs. capital expenditures,” Tschepl says. “Companies are able to get the right equipment for the application and only bear the cost of the time it is being used, reducing exposure.”
Rental agreements also allow customers to grow or downsize their fleet as needed, according to Bryce Puckett, general manager for rentals at Kirby-Smith Machinery Inc., and member of the American Rental Association (ARA) board of directors, Region Four. Kirby-Smith has a dedicated pipeline division that focuses on rental, service, parts and sales, while ARA is an international trade association that boasts 11,000 members representing owners of equipment and event rental operations, as well as manufacturers and suppliers of rental equipment.
“The main thing rental/lease agreements can do is to help keep you flexible during uncertain times,” Puckett says. “Having the ability to turn units back in as needed or flex upward as needed is key to managing quick turnaround times and being responsive.”
In addition to offering variable costs, lease and rental agreements allow companies to stay current with pipeline regulations, says Wes Nichols, general manager at TPE Midstream, which serves both contractors and operators. The company provides equipment that enables natural gas and liquids pipeline companies to “remain the safest, most environmentally sustainable neighbor” in the communities they serve, such as compressors, frac tanks and pig launchers and receivers compatible with inline inspection (ILI).
“Consider the PHMSA-required integrity inspection of multiple pipeline segments,” Nichols says. “These efforts may require longer launchers and receivers than the pipeline has installed for general maintenance pigging operations. Renting those launchers and receivers to enable those integrity runs is a cost-effective method of completing the work without having to access capital to modify the pipeline with engineered, purchased, installed, tested ILI-capable pig traps. Rent costs can be designed into the overall cost of the inspection project, so the pipeline pays only for what they need when they need it.”
Furthermore, rental and leasing agreements allow customers to adjust to different needs of different jobs, according to David Bourdon, president and CEO of Perco Rentals, a specialized rental company that provides the “yellow iron,” such as excavators and side booms that are ubiquitous on pipeline spreads, as well as rubber track crawlers that haul mats, people, welders and whatever else is needed down the right-of-way.
“Not every pipeline project is the same,” Bourdon says. “The type of equipment a contractor used on the last job may not work on the next. When you rent equipment, you can tailor the gear to the specific need. Rental equipment does not require the contractor to hire a technician to repair and maintain. Delivery and pickup are handled by the rental companies. Availability, if a unit is down and not repairable on site, the rental company will provide a new unit. When the gear is no longer required, the cost ends as well.
“When you add the cost of capital, maintenance and logistics,” Bourdon adds, “combined with the need to buy multiple types of equipment, renting equipment is often the much less expensive.”
Benefits of Rental, Leasing Agreements
When it comes to renting or leasing equipment, pipeline customers are looking for a fair deal and reliable service.
They’re looking for “someone they can trust,” Tschepl says. “They ultimately want suppliers that will be there for them when they need them to be, day or night. Suppliers that are experts in their trade who can provide them with the most productive, cost-effective solutions.”
Product versatility and availability is “the strongest case for renting,” Tschepl says. While many contractors purchase equipment that it commonly used throughout a project, other equipment such as shoring is not “a one-size fits all scenario.”
Renting less commonly used equipment, Tschepl says, “provides customers with the assurance that they will always get the newest, most up-to-date fleet, but also the right piece of equipment for the job they are performing.”
Most pipeline customers have a singular focus, Puckett adds. They’re looking to complete their project in a safe and quick manner. It’s important that rental or leasing agreements suit the customers’ needs.
“The rental agreements need to be fair and clear,” Puckett says. “There is a very important distinction to be made between renting and leasing. Rental is the short-term, usually less than 12 months, usage of equipment for a fee with normally no or minimal amount of required time. Leasing is typically a [longer]period of time, 12-plus months, to use the equipment for a fee normally with an option to purchase or return at the end of the commitment. Leasing is a financial commitment, while rental is more flexible.”
With the boom and bust cycles of the pipeline industry, Puckett says that renting equipment can relieve financial burdens associated with equipment ownership.
“Renting equipment is very popular with pipeline and like customers who have large increases in business levels that may need to be met,” Puckett says. “This allows the capital burden to be on the rental company while still having the equipment to get the job done be readily available. If a long-term opportunity presents itself for ownership, look for a rental company that will entertain Rental Purchase Options for equipment you have on rent.”
Impacts of Pandemic and Oil Prices
The COVID-19 pandemic and the concurrent drop in oil prices as a result of the dispute between Russia and Saudi Arabia have had a significant impact on the pipeline industry in 2020. Some pipeline projects have been shut down temporarily or postponed because of these conditions.
As of this writing, ELFA had reported that overall business in 2020 was up 10 percent compared to 2019, but new business volume had fallen 7 percent in April, based on a report from 25 companies representing a cross section of the $900 billion equipment finance sector that the association represents.
“Business performance shows deterioration from the effects of the coronavirus pandemic, with volume levels and portfolio quality metrics both falling in tandem,” Petta says. “The expectation is that this pattern continues into the summer months as the nation’s economy dips into a recession. Time will only tell whether these conditions stabilize in the face of massive fiscal stimulus provided by the federal government.”
Despite the massive impacts of the pandemic, with social distancing requirements and non-essential businesses being shut down or forced to transition to working from home conditions, Puckett says that energy commodity prices may have had larger impact on the industry.
“The pipeline rental business has been more impacted by the price of oil than by COVID-19,” Puckett says. “Our business practices have changed to accommodate ‘touchless’ parts delivery and additional PPE for all our employees to protect both our customers and our employees.”
Meanwhile, Nichols says TPE Midstream’s business has seen improvement this year.
“I am not sure we can call it true cause and effect, but TPE’s rental business in 2020 has far outpaced the level of activity we experienced in the same period prior year,” Nichols says. “Might the pandemic have played a role? Perhaps operators saw the near future market uncertainties and retreated from capital spending in advance of a potentially protracted slowdown. We cannot be sure. But our activity has been up year over year.”
Petta adds that equipment rental and leasing has become a more attractive option for some customers during this downturn.
“Equipment leasing and financing offer a strategic financial option for businesses to consider regardless of the economic climate,” Petta says. “But it is an even more attractive option given the current environment where maintaining cash flow, preserving capital and obtaining flexible financial solutions are even more critical as businesses ride out the storm. Uncertainty, negative economic conditions and deteriorating forecasts are challenges to growing a business, but for those businesses that want to stay competitive, especially during a downward economy, it is critical to be strategic about how you acquire equipment.”
Bourdon adds that pipeline customers are looking for ways save money anyway they can.
“We have seen our customers look for ways to reduce cost, which often involves looking for a more efficient way to complete a project,” Bourdon says. “For instance, we were able to provide an innovative solution for a customer to seed a right-of-way, reducing a four-man job to a one-man job using a Sherp ATV.”
The COVID-19 pandemic has forced companies to become innovative in addressing their business, from training to customer service.
With social distancing restrictions, Tschepl says United Rentals quickly adjusted how its training department operated.
“As COVID-19 restrictions increased, we suspended our in-person training in mid-March,” Tschepl says. “By early April our training team was able to shift to a virtual platform and execute ‘in-person’ competent person trainings for multiple customers. This practice is continuing and evolving.”
Product delivery also required an adjustment, Puckett says.
“We have significantly increased our parts delivery and curbside delivery services, and we are working with our customers to maintain fleet on-site in the event that a project has a temporary shutdown due to COVID-19 related issues,” Puckett says. “Things like curbside service and touchless payments and deliveries are now the norm in our industry. I believe the level of desire most organizations have to take care of customers is being shown in the ways they adapt.”
Assisting the Rebound
As the pipeline industry seeks to rebound from the current downturn, rental and leasing companies can offer cost-effective solutions amid economic volatility.
“Capital lending will be an issue for those contractors that traditionally purchase their equipment,” Bourdon says. “This will push many of these to utilize or expand the use of rental equipment. This has been true of every downturn since the 1980s.”
Flexibility will be a key factor in the pipeline industry returning business to the level before COVID-19.
“As pipeline companies regain their financial footing, they may be able to leverage the availability of lease and rental equipment to delay capital expenditures,” Nichols says. “Pipelines will continue to flow. As commodity supply and demand stabilizes, market dynamics will return to their pre-COVID-19 states. The transition from ‘pandemic shutdown’ to pre-COVID-19 will require flexibility. Rental and lease options offer just that. The pipeline operator can bring facilities back up to pre-pandemic operating levels while conserving valuable capital for long term growth.”
For the contractors and service providers, rental and leasing options allow them to seek work regardless of the scope of the project.
“Having the flexibility to bid jobs large and small regardless of your fleet size helps greatly,” Puckett says. “We do equipment. We don’t know how to dig a perfect trench or lay pipe in the ground, but we can get you what you need to get the job done.”
Bradley Kramer is managing editor of North American Oil & Gas Pipelines. Contact him at firstname.lastname@example.org.