Effects of oil downturn reach far and wide

2016 Mid-Year Economic Forecast

The price of oil hasn’t been more than $65 per barrel since late 2014, and while that’s good news for drivers at the pump, it spells trouble for companies with products that support the oil and gas industry.

Menomonee Falls-based Actuant Corp. is among those companies, with about 25 percent of its revenue coming from oil and gas. The $65 figure matters because that’s the price Randy Baker, Actuant chief executive officer, sees as the trigger point at which oil companies will return to making capital investments and increase demand for Actuant’s hydraulic, mechanical and joint integrity tools and connectors.

Baker
Baker

Demand for new equipment used upstream in exploration and extraction came to a “crawling halt,” but Baker said the company has had some success with products used downstream, where oil is converted to gasoline.

The company reported an almost 5 percent drop in revenue in the quarter ended May 31, after a 15 percent drop during the same period in 2015. Even with diversified offerings, Actuant still sees secondary and tertiary impacts from the oil downturn.

The slump has been caused by fairly straightforward economics. A surplus of oil was created as a glut of U.S. oil hit global markets, thanks to advancements in fracking opening up new fields.

“The demand just didn’t keep up with supply,” Baker said.

Even though there have been two significant drops in the price of oil, there are signs of improvement. Baker said demand has been steadily increasing and the oil surplus is half of what it was a few quarters ago. If the trends continue, supply and demand should come back in-line sometime in 2017.

“It is absolutely contingent on a very controlled production environment,” Baker said, cautioning that can be easier said than done in the oil industry.

To get through the downturn, Baker said Actuant must manage its cost structure, making cuts where necessary, while also focusing on any positive sales potential to capture market share.

At the same time, the cuts can’t be so deep as to hurt core competencies like engineering, field sales and service.

“You’ve got to protect those so you don’t damage the business,” Baker said.

The challenges in the oil and gas industry have also popped up in other places in Wisconsin’s economy.

Milwaukee-based Harley-Davidson Inc. reported in April that it missed out on the sale of about 530 motorcycles because of reduced consumer spending in the slumping U.S. oil patch.

Waukesha-based Generac Holdings Inc. moved work in its mobile heating business from Bismarck, North Dakota to Berlin, Wis. because of continued weakness in the market.

shutterstock_527235Racine-based Twin Disc Inc., which makes power transmission equipment, reported no new orders or shipments into the oil and gas market during its most recent quarter. The company’s revenues were off 38 percent for the first three quarters of fiscal 2016, largely because of reduced demand for oil and gas-related products.

Lower gas prices have also contributed to record auto sales. That’s allowed Waukesha-based Husco International Inc. to invest in its automotive business, even as it has had to scale back in other areas.

Adient, the planned spinoff of Glendale-based Johnson Controls Inc.’s automotive seating business, will benefit from increased sales of SUVs, which have more seats and more complex seating systems compared to passenger cars, incoming chief executive officer Bruce McDonald said earlier this year.

Germantown-based MGS Mfg. Group, which makes a significant portion of its revenue on plastic injection molding, hasn’t been able to capitalize on lower oil prices as much as might be expected. While the lower prices drive down the cost of resin, fluctuations are expected and most contracts already include price-averaging, said John Berg, director of marketing at MGS. Lower prices don’t hurt, but the benefits come in transportation and other areas companies not exposed to oil and gas would also see.

“When the cost of our services and supplies goes down as part of a visible trend, our customers expect an appropriate reduction,” Berg said.

The investment required to transition parts from one material to another means that original equipment manufacturers aren’t likely to switch just because of lower resin prices, Berg said.

MGS also can’t stockpile resin to take advantage of lower prices.

“We would need to pay for it and hold it until it is needed in production,” Berg said. “That would expose us to the risk of our customers’ business being interrupted by forces out of our control.”

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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