Drilling for Dollars — Dealers are farming lucrative 'fracking' industry for sales

AKRON (April 4, 2013) — It's the "F-word" that's helping tire dealers in certain regions of the U.S. enjoy the prosperity brought about by a surge in tire sales and service to oil and gas companies.

"Fracking" — slang for hydraulic fracturing — has, during the last few years, created a gold rush of jobs and spurted a bounty of cold, hard cash into local, regional and state economies.

The process of fracking involves the use of water pressure to create fractures in shale rock to release oil and natural gas.

With the oil and gas fields, usually located on farmland or in sparsely populated areas, comes an influx of trucks transporting oil, gas, water and supplies. That translates into a surge in light truck and commercial truck tire sales and service for local dealerships.

Last year, Wellborn Tire Group, a wholesaler in San Antonio, experienced 30-percent growth in sales — and fracking contributed to at least half of that, according to CEO Alex Wellborn.

He noted that normal growth would be minimal due to the sluggish economy.

"But the activity that's going on in south Texas with the oil fields and the fracking has been huge for us," he told Tire Business. "If it hadn't been for that, we'd be hurting."

The company sells every type of tire, but he said the "industry, the fracking and the oil field, has definitely adjusted my purchases. I am leaning more towards TBR and the commercial tires. I'm selling twice as many tires than I would if I didn't have it. We still have a good trucking industry in this area,…but mainly it's because of the oil field."

Boom in sales

While there has been controversy surrounding the environmental consequences of fracking, there is no dispute that the proliferation of such drilling sites, especially in North Dakota, Texas, Louisiana, Ohio and western Pennsylvania, has brought increased sales, along with some headaches, to nearby tire dealerships.

The boom has spurred skyrocketing prices for rental properties, higher pay scales, labor shortages and more crime to the local communities.

"It's been more of a double-edged sword. There are benefits to it but there are a lot of challenges because of it as well," Shannon Myogeto said, vice president of operations for O.K. Tire Stores in Fargo, N.D.

While the retail/commercial/wholesale dealership has experienced a 5-percent boost in its commercial business since the oil companies set up their operations in North Dakota a few years ago, it has also struggled with maintaining profit margins.

Many of the large oil companies buy tires through national accounts with set tire prices. But wages have increased dramatically in these markets with the lure of high-paying oil field jobs forcing other employers to raise wages to fill their own job vacancies.

"It's affected us across North Dakota, and that's been a real challenge because we can't get more for a tire but we have to pay people more," Mr. Myogeto said. "So what's really been the challenge is the people side of it."

In some areas the boom that began a couple of years ago has begun leveling off as oil and gas firms have established their wells.

"At first it was kind of the 'wild west' and everybody with a truck was trying to get in on it," said Mr. Myogeto. "And now what's happening is those little guys are getting forced out and the big companies are there to stay. They're the ones that are going to be there for years and years to come."

Sales started out slow this year but have picked up a little in March, according to Mr. Wellborn, who noted that his sales are already 20 percent higher than the year-ago March. He expects sales to increase about 15 to 20 percent this year.

Dave King, manager of Tire Rama's Interstate Manufacturing in Billings, Mont., which services fields in nearby North Dakota, said fracking has had a positive impact on his business, but his enthusiasm is tempered by the limited lifespan of an oil boom.

"We definitely like the business we have in town because that's going to be with us forever, and we hate to get too much wrapped into the North Dakota stuff because it could end any day," he said. Tire Rama has eight stores in Wyoming and Montana located near the fracking regions. The stores have seen the impact of the higher disposable income oil companies are providing their well-paid employees.

"When you sell a lot more wheels for pickups and stuff, you know it's driven by that. They come into town, they have money in their pocket and they buy them.… It impacts our retail sales and our commercial sales," Mr. King said.

"The good thing about the oil business is that they have to drive that stuff, they have to drive to get to it and you have to drive back. And so the more miles you put on your vehicle, of course you wear out tires faster. And so our light truck business has exploded," said Jarid Lundeen, owner of Minot Tires Inc., which does business as Tires Plus, in Minot, N.D.

The dealership, which sells passenger and light truck tires, has seen a surge in truck business due to the number of one-ton trucks used at the oil fields.

"We see a lot of those vehicles in our shops and our quick lube. It's very busy," Mr. Lundeen said.

The dealership saw more business from the oil fields two years ago, but now many oil companies have set up their own truck service facilities and are doing work in-house.

Still, the increased traffic prompted Tires Plus to add four bays to its Minot store, which among the three Tire Plus locations, is most impacted by the oil business. The company also added 15 employees during the past couple years.

"Our shops are only so big and we've pretty much blown the doors off, even right before the oil business," Mr. Lundeen said, adding: "We've only been here for 13 years and every year we've grown a lot. So a lot of it was organic growth internally and now we've seen the same percentage of growth because of the oil business in the last couple, two to three years. But before that we were still growing and grabbing market share."

From 2011 to 2012, Tire Plus' sales grew 10 percent, Mr. Lundeen said. "The last three years have been chaos and now it's really stabilizing, I think we're going to see growth but not as impactful as it's been in the last three years. Everything is stabilizing in this market. The last three years it was spiking like you can't imagine. The oil companies have the holes drilled now, so they're stabilizing, too."

Meanwhile the fracking boom has only recently come to western Pennsylvania, where sales of commercial and OTR tires and service have increased more than 20 percent for Good Tire Service Inc. in Kittanning, Pa.

Scott Kline, manager for Good Tire's commercial tire center, said that once the water trucks started coming into the fields about eight months ago, there was an increase in demand for tires. The dealership runs four service trucks to the nearby oil fields.

Meeting demand

The oil boom has prompted some tire dealerships to expand their operations to service the oil/gas fields.

Beasley Tire Service Inc. in San Antonio opened an outlet in Kenedy, Texas, near the oil fields nine months ago. Owner Bob Beasley said the fracking operations in the Eagle Ford shale region are "the only reason we're there."

About 80 percent of Beasley Tire's sales involve commercial tires and the fracking boom has added to its sales, he said.

The fields in Texas require 24/7 tire service, Mr. Beasley told Tire Business, and that's something his dealership already offered. But he said it's in higher demand in the great expanse of the oil fields. To that end, Beasley Tire set up a couple of trucks as mobile tire service shops.

"We run some special equipment on Highway 35 where the Eagle Ford shale field is so broad and so wide…to do specialized service up and down through there because it's so spread out, it's hard to put a store in one particular place. So we run rolling tire shops that do full service through the whole area," he said.

Meanwhile in North Dakota, O.K. Tire was prompted to open a location "in the middle of the oil fields," according to Mr. Myogeto. The dealership, which has seven tire stores, is involved in retail, commercial, retreading and wholesale.

With the opening of the additional store in Watford, N.D., in June, the dealership hopes to capture more tire and service business from the oil companies, he said.

"You don't make any money on tires when you have to truck them from 200 to 300 miles away. It eats up your profits pretty quickly. So what we're hoping to do is to capture some of the service out there (in the fields)," he said.

The oil companies want their truck and OTR tires mounted and serviced on site. "That's difficult but hopefully we'll be set up to do that here shortly" with the new store, Mr. Myogeto said, noting, "These companies in the oil fields are all doing national accounts, so the (tire) prices are pretty much fixed. So if you're going to get in on it, if you're going to make money on it, you're going to make money on the service side of it."

Mr. Lundeen of Tires Plus is in the process of opening a new business, Berkley Tire Wholesale Co., to distribute medium truck, LT and passenger tires to the oil fields.

The wholesale operation will sell nearly all major brands of tires and is setting up a website and next-day delivery.

"I had to add another 20,000-sq.-ft. warehouse and I've had to hire more people," said Mr. Wellborn of his wholesale business in San Antonio. "I've had to increase my services down to the south. I even deliver tires down south on Saturdays now…. As you grow, of course you have to adjust."

He said he opened the second warehouse in San Antonio two years ago down the street from his existing 32,000-sq.-ft. warehouse.

His timing was fortunate, he said, because shortly after locking into a lease for the building, rent skyrocketed in the area as oil companies came to town and leased buildings without negotiating price.

One of the challenges the wholesaler is facing now is filling supply voids in the expansive oil fields. Mr. Wellborn said the oil companies buy tires and services from businesses that can come on site. "That's been a hurdle we've been trying to get over. Where we have voids, we're trying to get dealers. When we can't get dealers, we try to get (tires directly) to the end-user," he said, noting that about 5 percent of his oil-related tire business involves direct-to-end-user distribution.

Pay rates

The oil boom has created a shrinking labor pool and a higher pay scale that has cut into tire dealers' profits.

O.K. Tire in Fargo has been able to fill its job vacancies, Mr. Myogeto said, but keeping new hires has been a challenge. "For instance, we hired a tire tech at one of our stores for $17 an hour, which is unbelievable around here for that kind of money, and three weeks later he was gone. He got a job offer for $20 an hour. And that's what you see. Luckily, we have a lot of very loyal employees and so our base is consistent. And then you just have a few of those tire tech-type of positions that are turning (over)."

Beasley Tire has hired more employees—"all the ones the oil company didn't hire that we could get," Mr. Beasley noted. He said the population is sparse and the wages for oil field jobs are strong. "We've had to stay at the top of the pay grade, let's say that."

Despite the higher wages, the company is making a profit from the oil fields. "We wouldn't be there if we weren't. It's tough but we make a profit," he said.

"We've all had to pay a little more money to keep good employees," Tire Rama's Mr. King said.

Tire Plus' Mr. Lundeen noted that the labor crunch has eased in the last six months. "Prior to that was very difficult to recruit and maintain." His dealership also has had to increase its pay scale.

"If you were to move to this town and open up a store, you would have no employees," he added. "The network is so wound tight that there are no extra employees in the market. So you have what you have and you keep what you got. There's very little transition."

Downside

While tire dealerships are enjoying increased traffic in their bays, they—and some citizens—don't like the traffic jams in their communities. Caravans of transport trucks have snarled traffic, caused accidents and destroyed roads.

The big issue in southeast Texas is that the infrastructure is not strong enough to contain all the trucks on the road, Mr. Beasley said.

But even rough roads can be a benefit for some tire dealerships. Mr. Kline of Good Tire Service said the damaged roads leading to the oil and gas fields in western Pennsylvania have created a surge in consumer tire repairs.

There is also a spike in crime in some small communities.

"We see a lot of crime. Prostitution is up, murders are up, domestic violence is up, alcohol-related crimes are way up. It's very scary, very different," lamented Mr. Lundeen regarding what he described as the once sleepy community of Minot, N.D.

Some dealers also have complained that collections from some oil companies are slow because either they overextend themselves or they require a lot of red tape.

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To contact this reporter: [email protected]; 330-865-6127