Cheap Oil and it’s Effect on Equipment Values Today
CHEAP OIL AND IT’S EFFECT ON EQUIPMENT VALUES TODAY, “the key for lenders is using an appraiser who knows this machinery and the markets they trade in”.
OIL DRILLING: The crude oil’s sharp pull back in prices, $47.97 per barrel as of January 6, 2015, is beginning to have an effect on some equipment used in the oil patch both on land and sea. Older land based rigs and equipment that should have been scrapped by now are kept in service because of the hot drilling market.
An additional issue is changing regulations on diesel driven equipment, particularly California requires at least tier 3 or 4 engines. Drilling rigs built before 2000 are considered less desirable in the industry, but were receiving high enough fees to warrant their continued use. Now the industry may begin to scrap them to make way for the newer more technologically advanced rigs, of which 200 are due to be delivered over the next 6 years. That could mean 140 older rigs may be scrapped to make way.
In offshore drilling there are many drilling platforms that are being identified for scrapping, partly because it can cost as much as $12,000.00 per day to store them. The net effect of the change from $100.00 to $47.97 dollar oil may be reflected in the royalties and leases, not the equipment involved in its manufacture.
MACHINE SHOPS: All of this has a trickle-down effect on the suppliers such as rotary oil drills, valves, well heads and support equipment manufacturers. A machine shop that manufactures drill heads, like Baker/Hughes, rotary drill heads and spinning wrench manufacturers, like National Oilwell Varco are already pulling their work out of the smaller shops that support them to do the work in-house, thus retaining key employees and cash flow.
We may see in the near future some of these support shops collapse if they have insufficient time and money to re-task into other industries such as aerospace or infrastructure. Most of these machines used to fabricate valve bodies, rings, pipe threading and a thousand other types of oil tool support equipment are generic in that they can be used in other industries.
Machinery such as vertical boring mills, horizontal boring mills, machining centers and turning centers are examples of the generic nature of the equipment used in oil tool manufacturing.
MACHINERY VALUES: Currently, the United States has the cheapest utilities cost in the world, which is the largest cost in manufacturing. Much of the work that went to China and other low-labor rate countries, which used to be subsidized by their governments, is returning to the US.
In the last four years the move has been gradual; however, the pace is picking up as utilities costs continue to go down. This has caused a back log of new machinery orders with wait times as much as a year or two depending on the tool size and the industry. As a result, it raises or supports used machinery values. If an oil tool machine shop fails, that equipment for the most part is expected to sell at or near prices seen during most of 2014.