Taking the Pulse of the HDD Market

By Sharon M. Bueno - Managing Editor of Trenchless Technology - July 1, 2010

One thing the horizontal directional drilling (HDD) community has learned is that the HDD market is resilient. After bouncing back from a crushing recession in the early 2000s, the HDD market took another body blow - as did the rest of the construction industry - in 2008 when the worldwide construction market tanked.

But unlike the rest of the construction market, the trenchless market's blow wasn't as harsh or nearly as damaging. The work slowed but went on. For HDD, it did not disappear altogether, leaving contractors with some work to tide them over until stronger waves returned. The last recession left the contractors and manufacturers that survived smarter and better prepared for this most recent economic downturn. Layoffs at manufacturers such as Ditch Witch, American Augers and Vermeer occurred over the last 18 months but cautious optimism is prevalent as the third and fourth quarters of 2010 move closer.

The surprise of 2010 so far may have been Ditch Witch's purchase of HammerHead in May, catching the trenchless industry and even Ditch Witch employees off guard by the acquisition. Stimulus funds that were to aid in U.S. infrastructure projects seemingly had little effect on the HDD market, we're told. Even the gas and oil projects have leveled off, stymied by lack of funding, although the work has been steady.

Fiber-optic projects have kept the smaller - to medium-size rig contractors busy in many quarters and geothermal work has become the new "it" thing for the industry experts to tout. The market slowdown has resulted in a stronger crackdown by inspectors and regulators on contractors, as well as renewed frustration in low bidding issues that has plagued the industry since the last recession.

Trenchless Technology spoke with HDD professionals - contractors, manufacturers and suppliers - to hear their perspective on how the market is shaking out and what the trends and lessons are from this most recent economic downturn.

Two of the leading directional drilling manufacturers - Ditch Witch and Vermeer - were effected by the slowdown a bit coming out of the gates in 2010 but are seeing signs of life in the HDD circles. Ed Savage, trenchless product manager at Vermeer, says he has seen a surge in equipment sales over the last eight months or so, raising his belief that the HDD market is slowly coming out of its funk. But for how long?

"We've seen an increase in our sales, but I want to temper that by saying the customers are still apprehensive about the [overall] economy," Savage said. "They don't know how long term this growth will be. Is it a blip or is it going to be a continued trend upward of slow growth? Everyone is scared to death about the economy right now. Not just in construction but across the board. People have spent money on directional drills but how long will that trend continue? That's the million dollar question."

Richard Levings with Ditch Witch is a veteran of the HDD industry and has experienced its ups and downs. He views the current HDD market two ways: by the number of rigs being sold and how well HDD is being accepted. Regarding the former, Levings says the market over the past 18 months has been relatively flat with peaks of positive news across all HDD segments (i.e. water, wastewater, fiber, etc.). Business has picked up in 2010 over 2009 but sales are still slow.

"From the number of new rigs that are going into the market, [the HDD industry is] not at its strongest point. It has been better in 2010 and late 2009 but it's nowhere near where it's been in the past," Levings said. "Today, at Ditch Witch, we are busy across the board. There are more maxi rigs being sold right now. A lot of the work with these rigs is dealing with energy development and natural gas, water and sewer."

But Levings also sees the HDD market today as it's never been stronger. "If you don't measure it by equipment sales and you measure it from utilization standpoint, HDD and trenchless overall has never been stronger," he said. "For years, we struggled to get HDD accepted, to get it to be the first thing people looked at rather than ‘Oh, we'll use HDD only if we have to.' We have transitioned to where HDD now is being specified on many projects. HDD now has a very strong brand name and people are using it in all fathoms of ways in terms of not just utilities but for dewatering, geothermal, water wells, pipe insertions, etc. From that standpoint, HDD has never been stronger."

How has the economy affected used equipment sales? Used equipment sales took off during the last recession and have been a popular option for contractors ever since. The state of today's used equipment market seems to be going the way of new sales: periods of high activity, followed by lulls.

"Based on conversations with our customers, particularly the domestic U.S. contractors, they alternate from being busy one week to having to deal with multiple weeks of dead time. Select international markets, however, are seeing a high resurgence in work, particularly in the long-quiet areas in the Soviet Union," said HDD Broker general manager Bob Martin, noting that drill manufacturers have stepped up their game in pricing to stimulate sales.

Martin further notes that he also sees the customer apprehension about spending. "Equipment retention is at an all-time high, with many expenditures postponed indefinitely and equipment upgrades and replacements put off until work picks up once again.

"I think that there are many contractors with a genuine interest in purchasing equipment who cannot obtain financing or alternate access to capital to make the purchases… The reality is most are a blend of the two situations, where there are companies that are in protection mode, avoiding all but the most necessary purchases and then there are some that wish to take advantage of low purchase prices and high availability, but cannot obtain the funds necessary to do so."

Bill Tippett, president and owner of Networx Cabling Systems, Flagstaff, Ariz., concurs with Levings' point of how strong the HDD brand has become in recent years and how that will affect the industry in the future. "The market has been flat but its adoption has increased," Tippett said. "I've seen [HDD] spec'd more often on projects than before. The perception people used to have was that HDD was only used in ‘good' soils but that has sort of fallen away and they realize that it can go through adverse soils. Once we start to recover from this recession more, I would think the adoption of HDD is going to, proportionally speaking, be much faster than other methods. Understanding will drive its demand. If HDD contractors can hold on through the recession, they will see an increase in demand for their services over traditional open-cut contractors."

Tippett has been in business since 1988 but entered the HDD market in 1998, working primarily in northern Arizona on smaller installs, mainly fiber-optic. He said the work has dropped off significantly in the Phoenix area since 2007 but his company has done well enough to sustain through these rougher times. He sold several rigs in his fleet in 2007 before the market dropped but he plans to start buying again once he feels confident in the market. He, like many contractors, learned lessons from the previous downturn in terms of working within your means and being financially cautious.

"Our plan is to take it slow and be cautious," Tippett said. "In our local region, we think [the market] is worse than 10 years ago, as the downturn has been as significant over a longer period."

On the other side of the spectrum is Mears Group, which is a key player in large rig work for pipeline and wastewater. Allen Wishon, Mears HDD business development manager, says there is still plenty of large rig work but the projects have slowed with funding being held up. "I think most folks who have been around for awhile understand it. We've all seen this before," Wishon said. "Directional drilling is still an up-and-coming technology and it's being used more and more. The good contractors are surviving, actually better than surviving. We are cautiously optimistic as we get into the second part of this year."

Grady Bell, vice president of business development with Laney Directional Drilling and chairman of the HDD Committee for the DCA association, says it's been slow for pipeline work in 2010 but it has been picking up, noting that Laney has all of its rigs running at this point. What he hears from other contractors is that over the next six months, they will be busy but may slow down again in the fourth quarter of 2010 and the first quarter of 2011. "[Rig] utilization is probably at 70 to 80 percent now, compared to six months ago when it was 20 to 30 percent."

Recession Effect on Contractors

As with any crisis period, reflection and learned lessons emerge. For the HDD market, it has been more conservative by financial planning and diversification after learning from the recession 10 years ago. Tippett notes that the recession has hit the Arizona HDD drillers harder this go-around, saying that the downturn has been significant for a longer period of time than the last one.

Wishon noted that as the oil and gas markets have slowed, Mears has turned to its water and wastewater work and continues to build that up. "We're seeing opportunities there," he said, noting that other areas smaller contractors are exploring include underground electrical transmission distribution, geothermal and fiber. "The key is not to put all your eggs into one basket."

One area that contractors have dealt with over the years and has made a stronger imprint on industry in the last 18 months, has been low bidding. Wishon says there are contractors bidding jobs at low prices that get them the project, but owners are realizing that those contractors will cost them more money in the long run.

"Low bidding pulls down the market," Wishon said. "But we are seeing movement by owners in the public sector asking for pre-qualification bids, which will eliminate contractors who are not qualified to handle certain jobs and makes it much more competitive."

Tippett has also seen a slight shift in the mindset of owners now asking for pre-qualification before bidding, saying that it has benefited contractors like his company that have built a strong reputation. He has also noticed a change in the bidding process in Arizona that he likes: bidding what the job is actually worth. "Two years ago, people were bidding below cost to keep working. Now, people are realizing they can't survive under that strategy and that they need to start pricing at what it costs with a relative profit," he said. "The attitude has changed to: Bid it to make money and not bid it to win it. And I have seen the pricing coming back up because of that mentality, which is what we have been waiting for.

"That's the prevailing shift that I've seen that I'm happy about," Tippett said. "This will lead to a healthier industry and prices end up where they should be."

Bell said the DCA's HDD Committee has discussed the bidding practices, but said it's more of an issue for the smaller contractors. Other issues the HDD Committee has reviewed include mud disposal. "The biggest issue right now is safety and environmental regulations," Bell said. "They have gotten more restrictive on a lot of our activities such as mud recycling and disposal of cuttings."

Bells also noted that contractors are being asked to produce longer and longer crossings. "Everyone is still trying to push the envelope," he said.

But as Savage noted, it all goes back to confidence. "There are just no telling signs on the horizon that we're going to see the long-term growth coming back anytime soon. The guys who held on through the last one, learned some key lessons as far as managing their business and keeping their cash reserves closer to their pocket."

Published on Trenchless Technology.

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