Rubber firms grapple with decline in oil, gas

The steep decline in the oil and gas industry has been tough on many rubber product makers serving the sector, causing drops in sales and in many cases staff cuts.

But rubber manufacturers, by their very nature, are resilient. They have to be able to keep their heads above water in some very turbulent markets.

So those supplying the oil and gas sector—particularly those that are more diversified—have been working hard to offset drops in that industry and also find ways to bridge the gap until the price of oil and natural gas returns to levels that once again make business in this area economically viable.

Thus, many supplying oil and gas haven't panicked.

Companies such as Whittier, Calif.-based Santa Fe Rubber Inc.; Seals Eastern Inc. in Red Bank, N.J.; Plymouth, Mich.-headquartered Freudenberg-NOK; Semperit A.G., based in Vienna, Austria; Precision Polymer Engineering L.L.C. in Brenham, Texas; and Eaton Corp. P.L.C.'s hydraulics unit, out of Eden Prairie, Minn., have used their versatility to move forward during the difficult market conditions.

All see an eventual rebound of oil and gas, but their opinions vary on when that will occur. Here are their insights on what they have done thus far to weather the storm.

“Our oil business is down significantly in the first quarter of 2016 compared to last year at this time,” according to industry veteran William Krames, president and CEO of Santa Fe Rubber. “While we have reports of it picking up for the remainder of the year, the oil and gas business is sluggish at best.”

Santa Fe's oil and gas revenues are down about 75 percent compared to the same period last year. Some industries it services are up, but not enough to compensate for the loss overall, he said, adding that “the glut of oil in the national inventory at 500 million barrels continues to concern us in that curtailment of drilling will continue to impact SFR's business overall.”

As in any downturn, Krames said, companies are forced not just to get leaner, but find ways to improve output and become more efficient. Some cost-cutting measures SFR has employed include load shifting to the night shift with lower electricity rates, outsourcing some laboratory testing and material prep, reducing scrap by reworking customer tooling, and fixing equipment when it breaks down rather than replacing it.

It also made a small number of layoffs to restructure the firm's administrative overhead, and all indirect labor has been reduced to part time at 29 hours a week. In addition, he said, the firm's molding department workers and other direct labor employees have been placed on a rotational work share program.

“SFR launched an aggressive internet marketing program late last year using social media, direct email campaigns, telemarketing and direct mail, and we're excited about the results so far,” Krames said. “We're optimistic that this effort will eventually reap substantial benefits in new business development over both the short and long term.”

He said that many oil and gas customers are forecasting a pickup in business at $40 a barrel, and the industry will be back to early 2015 levels when oil pricing reaches $50 a barrel. “Since so much of the custom molding business has been shifted offshore, any focus of the government to level the playing field with offshore companies will yield a direct, positive impact to SFR's sales forecasts and hiring.”

Another longtime veteran, CEO Daniel Hertz Jr. of custom molder Seals Eastern, agreed with Krames, noting that the oil and gas business presently is not a growth market. “We have seen a diminishing amount of business in the oil and gas market.”

Seals Eastern, with a substantial presence in the O-ring market, has an advantage when it deals with customers or potential customers, according to Hertz, who has been in the O-ring business since 1953. “When you have the right product with very unique characteristics, which we do, that basically fits your base load of business, and you have no real competition, then you continue to do well.”

He's referring to the company's FEPM—”simplistically a half-fluorinated EPDM”—product. The company has been working with it since the 1980s and had developed a series of formulations suitable to deal with higher temperature requirements, which came to the forefront in the 1990s, for a variety of vehicles.

Seals were a particular issue in engine coolants, especially when it came to diesel truck engine, oil and gas down-hole, and diesel locomotive reliability, to name a few, Hertz said. EPDM elastomers are the workhorse materials for low temperature, but higher temperatures created the market for Seals Eastern's products, he said.

Hertz said his company's technology—based on the fluoroelastomer Aflas—has unique characteristics with widespread appeal and fits into a variety of markets. “We go into areas that the other guys can't even understand.”

Because of that, he said, “business in general is healthy.”

Hertz said the number of employees that make up Seals Eastern's work force has gone through a period of attrition, but mainly because when employees leave or retire they are not replaced. The firm has not made cuts because of the drop in the oil and gas segment.

He figures any recovery in the oil and gas industry is a year down the road, but “we're still driving our cars and heating our houses, so people still need oil and gas.”

Meanwhile, Seals Eastern, which is involved in a number of other segments, “will continue to keep all our plates spinning at all times,” Hertz said.

Freudenberg-NOK President Matthew Portu said his company saw a decline in the oil sector coming, but not at the current magnitude, with a nearly 70 percent drop in oil prices.

He said the company anticipates some recovery and predicted the global glut will persist until at least some time in 2017.

“We're not seeing a big, big rebound in 2016 or even into 2017,” according to Portu. “That said, the economist in me has seen over time when you have a finite resource, typically it does rise in price over time. So unless we see a global demand situation that noticeably shifts downward, I think crude is going to walk its way back up over the next few years.

“Whether we get into the $100s or $120s, I don't know. But I think we will be on a path that's up.”

He said low gas prices have had a big impact on U.S. consumers, with many moving back into larger vehicles.

If fuel prices stay low and that shift to larger vehicles holds, that pressure is going to intensify on original equipment manufacturers to hit the U.S.'s 2025 fuel economy regulations, the executive said.

Portu maintained that the “products at Freudenberg and the technologies that we offer are positioned very well to help the OEs get there or at least drive toward that goal. I think what's happening with oil will stress the system.”

Precision Polymer Engineering opened its first U.S. manufacturing site in Brenham in late 2014—the firm is part of a company based in England—and about half of the output was planned to go into the oil and gas market. But that was about the same time the downturn in the oil and gas market started to hit, so the maker of high performance O-rings, technical moldings and sealing products looked to other industries it serves to pick up the slack, said Steve Jaegels, the firm's global marketing manager for oil and gas.

“We run product in there for several industries, so it's still busy,” he said. Some of those markets include food and pharmaceutical, chemical processing, semiconductor equipment, diesel engines and aerospace.

Even within its oil and gas business, Jaegels said PPE is reasonably well diversified and may not have suffered as much as other rubber product firms servicing the sector.

“We have a number of customers and applications in what we call critical seals,” he said. “There is still demand for that type of product, even within a poor market environment.”

With fewer new projects coming in, he said PPE is able to focus its time and resources on the best of those.

“It's probably the silver lining of it all,” he said. “You can focus really on the best ones, and realistically bring some success that way.”

The company is focusing more on testing of its products and filling in technology gaps while there's extra time. ““We'd all like prices to be a lot higher,” Jaegels said.

“If we can plan in the right way, we'll be positioned for the upturn and be ready to go. I still have to be an optimist. Obviously it's been a longer period of time than most people expected initially.”

He didn't want to hazard a prediction on when oil prices might rebound, and with it, the fortunes of suppliers to the market. “I still come to work knowing there are problems to be solved. We just stay focused on the customer problems, and we seem to maintain a reasonable level of business.”

Eaton officials acknowledge that they may have been a bit behind the curve in reacting to the decline in the oil and gas market. The global conglomerate uses distributors to service both offshore oil production and onshore sectors—including fracking for natural gas—with a variety of hydraulic and industrial hose lines and related fittings and accessories.

“When the oil and gas market started to take the precipitous decline last year, we really didn't react to it very quickly just for the fact when a lot of the business goes through distribution, you don't necessarily see it right away,” said Scott Campbell, Eaton product marketing manager for fluid conveyance.

Eaton supports a lot of OEMs in the agriculture and construction markets, he said, so it is closer to the markets in getting information, but in oil and gas that isn't the case. “We get the information through distributor partners,” he said. “No. 1, it's not necessarily the most up-to-date information. The accuracy is not very good because we're depending on a channel partner to get the information.”

So when it started to become clear that the oil and gas markets it served began to fall, the purchases from distributors Eaton uses in such regions as Oklahoma, Texas and California were off substantially, according to Campbell.

Products impacted included higher pressure premium products for onshore and offshore applications; Synflex subsea oil and gas bundle hose lines; high pressure spiral hydraulic hoses, fittings and adaptors; braided hose for equipment used for fracking; and industrial hoses, also used in fracking.

“We've seen decreases in sales on those types of products across the board,” he said, “whether used in subsea oil and gas, exploration, or even onshore fracking.”

Despite the downturn, Eaton still sees oil and gas as being an important market to continue to support, Campbell said. Efforts will continue to gain needed certifications that are required for its products used in the sector.

Eaton also is investing in corrosion resistant products and carbon-steel lines that play a key role in some applications. He said Eaton introduced its Dura-Kote brand plating on hose fittings and adaptors in North America, with many of those products used in the oil and gas industry.

The company also has invested in adding inventory at its Van Wert, Ohio, facility for its Walterscheid-brand metric tube fittings that also are popular in oil and gas uses.

Of course, Eaton, like the others, doesn't know when that upturn eventually will come.

“For 2016, we are gearing up that maintenance orders (will grow) for oil platforms or onshore fracking equipment,” he said. “We are seeing a pickup in terms of those orders. But in terms of supporting new builds, they have just been non-existent.”

Chris Sweeney, Rubber & Plastics News staff, contributed to this report.