Suppliers Discuss Used Rig Market
"There's a lot more movement of used equipment than there is of new and it always will be that way," reports Delaney Erickson, sales representative for Venture Drilling Supply, Tahlequah, Okla. But Erickson does mention that while Venture sells twice as much used equipment as new, in the past couple of years, his firm has been moving more new equipment. "We're a distributor for Ingersoll-Rand as well as brokers of used equipment, so we see both sides of it." He cites initial investment as the main attraction of used rigs. "Used equipment is so much cheaper up front. The cost of getting into it is relatively minimal when compared to getting into a brand new rig," he says. "For example, say a new rig costs $450,000. We took a '95 model and rebuilt the deck motor, the compressor, the table - almost everything on it. It went for $250,000 and it's almost as good. We'll put anywhere between $30,000 and $50,000 to completely go through a rig, including sand blasting and painting."
Commenting on the size of the used drilling equipment market, Craig Higgins, owner of Higgins Rig Co., Hodgenville, Ky., says, "We do a lot more business today than we did 10 years ago. That's all we do for the most part - other than new parts and so forth. Probably 98 percent of our stuff is used." Higgins says that 90 percent of the time when a new rig is sold, a used one becomes available. "Occasionally someone will add one to the fleet, but, for the most part, another piece of iron is freed up in chain-reaction style," he explains. "Say, for instance, someone trades in a '95 for a 2001 model. The 2001 is gone, the '95 is sitting there as the next link in the chain. Somebody with a '85 model is going to want to trade up to the '95 model, so now the '85 is available. The guy with the '79 wants the '85."
"Almost every time there's a new rig sale, it includes a trade-in of some sort," concurs Erickson. "And those are good rigs for us. We take the time to rebuild them, fix anything that's wrong with them, sand blast and paint them, and then sell them. A contractor might not get as much money trading in his old rig than if he fixed it up and sold it on his own, but the folks that he's talking to about buying a new rig are so ready to get him into that brand new rig, they'll give him a pretty good price on the old one." Another consideration is whether or not a drilling contractor is interested in a part-time job selling the old rig.
"Half of our stuff we get through trade-ins or somebody parks a rig in our yard and wants us to sell it," Erickson says. "The other half is people we know who might be interested in a new rig, but they'd want to sell their old one first. We'll list that rig. It's not in our yard but it's for sale. We know whose it is and we have pictures of it and we handle it that way. Our used equipment customers usually are people who aren't busy enough, or aren't ready or aren't big enough to step into a new drill rig. They're looking for something a little less expensive, something they can get financed on easier. The leasing companies out there can get you financed, but you end up paying quite a bit more."
Higgins explains another common scenario: "If a driller is busy and knows that he's got some maintenance coming up on his rig, it might be easier for him to just move up five or 10 years. Or maybe a driller isn't busy and calls us and asks if we have a rig that needs some work. He's got a couple guys and it's slow and he wants to buy one that needs a little work on it. There's nothing wrong with that as long as you know what work needs to be done and are capable of getting it done right. If you buy a machine that needs some work from us. We'll say, 'OK. We've got this one; we think it needs about $20,000 spent on it.' You pay us for the machine, take it home and put the $20,000 into it. You get to write that off today and you've got a machine that's good to go. You're getting what is the equivalent of the investment tax credit that was taken away from the industry many years ago."
But there's another side to buying used that's a little less rosy. Jeff Jacomine, president of Drilling Equipment Sales Inc., Hickory, N.C., says, "Some people think that spending $150,000 is better than spending $300,000, but it's not always true. If you spend the $300,000 up front, you have a fresh machine that's not worn out. You can run it for a much longer time, you get the full tax credit, the full deduction. With interest rates the way they are, it's best to buy new right now."
The proof is in the pudding at his firm; at Drilling Equipment Sales, new rigs outsell sell used rigs 2:1. "It's cheaper to buy new than to buy used and have to do a lot of maintenance on an eight-year-old rig," Jacomine explains. "With an eight year old rig, you're coming up on a new deck engine, a compressor - you could be looking at a $45,000 overhaul. And with the little things - hydraulic lines, hydraulic fittings, fan belt motors, etc. - when you look at how many days you missed drilling because you worked on the rig, you're upside-down on a used piece of equipment. When the payment is $1,000 less but the maintenance is $1,300, it's actually costing more money to buy used. And the interest rates are about a point higher, and they'll only do a used rig five years; you can do a new one for seven. Anybody paying more than $210,000 for used equipment doesn't have a good accountant."
"Whenever things are looking a little tougher, people are more inclined to look at used equipment," Jacomine says. "But a problem in our industry is there isn't a whole lot of good used equipment out there; too much of it's all worn out." He gives examples: "You had the older guys who were retiring. They wouldn't buy new, they just wanted to get by. Now their sons have the company and they have to replace the equipment. They're not mechanics; they're well drillers. And more than a few drilling markets have been having a difficult time finding good quality people to run the rigs; those rigs come in pretty tore up." The good news from Jacomine: "People are taking better care of their equipment than they have in years past. They're learning that it is an investment that needs to be properly maintained. I have particular drilling firms I sell to that take the effort to do a good job of servicing their equipment. So when I get in a drill from them, I know it's been taken care of properly. There also are companies I steer away from. It's just different mentalities on the drillers' parts. And then there are the mechanics. One may keep good records, but when he's gone, the next person comes in and might not know what's going on at all. It's tough because it's such a small industry."
Practically in lock-step on that last point, Venture's Erickson tells us, "The reputation of the people you're dealing with is very important. Ask for references of people they've sold rigs to. In the drilling industry, it's a pretty small world. Word gets around pretty quickly - particularly when it's bad news."
The used rigs Jacomine's company takes in trade are sold "as is." "There's something for everybody," he notes. "It just depends on the people and their circumstances. With certain drillers, a beat up machine is just what they're looking for; they want to fix the rigs themselves." While that course of action is quite popular and can be very successful, Jacomine points out that, "Often they drill half the time and mechanic the other half."
Your mechanic is key when dealing with used equipment. "Have a good mechanic go over the rig," advises Erickson. "There are so many things on a rig that can go wrong. It takes someone who knows the particular type of rig and has a good deal of experience with its peculiarities."
Along similar lines, Jacomine has this advice: "Have a professional mechanic pull oil samples from the rig and have them tested. Check the air compressor to make sure it meets its rating. On mud rigs, check the gears and ring and pinion and gear case. Check the main drives and the pump and check the hydraulics."
"Maintenance records, if they're available, are great," says Higgins. "You can always pull an oil sample; that will show you the guts of the machine right there. If it's been taken care of or reconditioned, it will show up in the samples. If the guts are falling out, there will be a lot of shavings showing up. And condition is the main thing - over age and everything else. I've seen some people's rigs in worse shape after four years than some other people's rigs were in after 15 years. It's a matter of taking care of them; just like with the cars you see going up and down the road."
Jacomine discusses what he sees as a big problem in the industry: "We've got these jacklegs selling a well driller a used piece of equipment that's wrong for his application, getting him financed through a finance company at 17.5 percent, and selling it to him for a lot more than it's worth. All the jackleg's done is set that driller up for bankruptcy three years from now. It happens a lot and I don't like to see it. In too many cases, our industry is putting people out of business instead of putting them in business."
If you don't have an ace mechanic, a rig-purchasing strategy that might be the best way to optimize the characteristics of both the new and used markets is offered by Erickson. He says, "If you don't have a good mechanic, it can be better to go ahead and buy something new and let the warranty take care of things. A lot of drillers will get into a new rig and run it for five years until the warranty runs out. Then they trade that one in for another new one and keep it going like that. They stay protected by the warranty and when they trade in a machine that's only five years old, they're getting a pretty good dollar amount for it."
And hopefully, the rig was treated properly so another driller who's in a position to buy that five-year-old rig gets a good deal.