May 23, 2016 9 min read

When two professionals in the oil and gas industry spoke April 19 to 100 people at South Franklin Township fire hall about the future of the Marcellus and Utica shales, the crowd was particularly attentive.

The audience included many landowners, some bankers and attorneys, and representatives from the area’s philanthropic community, waiting with anticipation to learn when the industry – in a downturn since early 2015 – might return.

Dave Spigelmyer, president of the Marcellus Shale Coalition, and Nathan Snyder, a certified financial analyst with Snow Capital Opportunity Fund, who follows the oil and gas industry, told the group they believe the industry is poised for a comeback in the region in the third quarter of 2017.

Mostly missing from the audience that night were the people who have staked a portion of their businesses on the fortunes of oil and gas production in the Marcellus and Utica shales – those who make up the supply chain for an industry that extends across Pennsylvania and into West Virginia and eastern Ohio.

Spigelmyer acknowledged the supply chain has suffered with the downturn. He noted MSC, which represents drillers and their suppliers, has seen its membership shrink from around 300 to 220 since drillers began announcing what he said has amounted to a $12 billion cutback in capital investment since early 2015. Rig counts in the region have plummeted from 111 to just a handful in the past 18 months, as producers wait for natural gas prices – depressed to just over $1 per thousand cubic feet in the Appalachian Basin – to reach a point where drilling again makes economic sense.

Spigelmyer and Snyder believe drilling could be profitable at between $3.50 and $4 per mcf. But the Marcellus now has a capacity of more than 16.3 billion cubic feet per day, a tall order for a region that doesn’t yet have the complementary capacity to move a supply glut of that magnitude.

Those in the area’s supply chain are convinced that natural gas production will return, and most of those interviewed by the Observer-Reporter said they’re diversifying, pursuing business in other industries or making other defensive moves while they wait for the resurgence of gas.

Alex Gonzalez liked Western Pennsylvania for a number of reasons. Marcellus Shale was prominent among them.

Two years ago, he launched Neptune Solutions, a company that would treat water used by oil and natural gas drillers for hydraulic fracturing. It was based in West Texas, but after partnering with Pittsburgh-based EQT Corp., Gonzalez, a Texan, moved the company headquarters to South Strabane Township a little more than a year ago. He envisioned great potential and opportunity in Southwestern Pennsylvania.

Instead, the downturn caused Gonzalez to abandon the industrial complex off Route 136 for a “less expensive” – his words – location in Washington County, along the Monongahela River near Brownsville.

Neptune’s biocide water treatment operation there is bare bones. Gonzalez, the company president, said there is one contract employee working there, and most of the firm’s equipment has been returned to Texas. In the case of an upswing, “we can move it back,” he said. “But that won’t happen by 2017.”

“Pretty much every bit of operation in the Appalachian Basin is on hold,” Gonzalez said. “No one is doing anything.

“Everyone is operating at break-even or a loss. You don’t see anyone making a profit. And this (downturn) has been holding on for a long time. Every day, you hear about another company closing its doors.

“A lot of vendors are gone. There is equipment stacked everywhere, which means banks have loans on default. We don’t have loans on default. We’re staying alive.”

Neptune operates in the United States, Canada and South America. But these days, Gonzalez said his firm does 65 to 70 percent of its work in the Permian Basin, which stretches from West Texas into New Mexico.

“It is far less expensive to get oil and gas out of ground there than it is up here,” he said. “You can make money at $4 for oil and $2 for gas, but it’s tight.”

Mark Caskey is the founder of South Strabane Township-based Steel Nation, which provides sound-dampening buildings for midstream and gas transmission plants. He said his company, which builds the structures in the tri-state area, has weathered the downturn because it began doing more business with the transmission end of the natural gas business.

Since starting his business in 2008, Caskey made the shift from building structures for the coal-mining industry to the same type of work for the natural gas industry.

Today, Steel Nation, which employs 23 in-house and about 90 subcontractors, is doing work for Energy Transfer Partners as it works on the Rover Pipeline, as well as “a ton” of projects for EQT in Virginia, Dominion, Spectra Energy in Susquehanna County and Mark West Energy in West Virginia.

“We’re not setting the world on fire, but it’s not all doom and gloom out there,” Caskey said.

When told of the projected return of drilling activity in the third quarter of 2017, Paul Battista of Sunnyside Supply in Slovan was direct in his response.

“Eighteen months is a long time; it’s a long haul” he said. “No, we couldn’t continue to survive just on the gas industry for revenues.”

While he still sees some demand from the pipeline construction side of the gas industry, Battista said he’s also noticed the entry of large, national supply companies bidding for business.

“Larger companies are lowering prices” to get business, he said of the squeeze created when suppliers of all sizes compete for shrinking demand.

“We’re looking at other industries,” said Battista, adding that the product focus is on “safety and efficiency” in the workplace.

For now, the centerpiece of the diversification effort is the marketing of a portable, yet expandable set of aluminum steps that can be used in a variety of work situations.

Battista and an employee have hit the road to demonstrate the versatile product, recently traveling to sales appointments in Philadelphia, New Jersey, Connecticut, New York and Ohio.

“We’ve chosen a product that gets us into other industries,” he said.

Like others in the supply chain, Battista is optimistic about the return of natural gas in the region.

“I think it will come back,” he said.

That’s also the feeling at McCutcheon Enterprises Inc., a family-run business that also is working a diversification strategy while it waits for the return of gas drilling.

In April, the Apollo-based company, which has been in the industrial water-treatment business there for decades, opened an 8,500-square-foot equipment showroom and offices in Houston Borough on April 13, after renting space in an adjacent building for a couple of years.

“We’re committed to being here. We’re going to weather the storm,” said Chad McCutcheon, who, with his brother, Nathan, represent the fourth generation of the company operated by their father, Calvin McCutcheon.

The MEI showroom offers all types of equipment, chainsaws, trimmers and other power tools that can be used by everyone from those working in construction to landscapers and homeowners. There is also a hydraulic hose repair center that serves the heavy equipment industry. MEI also rents front-loaders and other construction equipment that can be used by a variety of industries.

Like his sons, Calvin McCutcheon is optimistic about the return of the gas industry. He said after a decade of “drilling a lot of holes” for gas wells, the lull “is an opportunity for the infrastructure to get caught up” to the supply glut.

He noted that current pipeline projects represent opportunities for MEI, adding that work for the gas industry hasn’t completely evaporated.

While MEI’s wastewater treatment services are used by a number of industries, “We’re still working for exploration and production companies,” he said, explaining that some of the companies are returning to previously drilled wells to recover more gas.

And when drilling returns to normal levels, the McCutcheons see more business as the state Department of Environmental Protection enforces its recently released Chapter 78 rule, which bars the unconventional drilling industry from storing cuttings and waste fluids in pits.

Just as MEI gave itself a “Main Street” presence in Houston in the midst of the downturn, John Bruno and his sister, Vickie Bruno, are holding steadfast to their strategy of selling work clothes – two floors’ worth – almost exclusively at their Mickey’s Mens Store on High Street in Waynesburg.

The Brunos, who inherited the store from their father, the late Mickey Bruno, began transitioning from men’s suits and sportcoats to work clothes over a number of years, originally catering to the area’s coal miners.

John Bruno said the move worked well for years, but credits the arrival of the shale gas industry as the spark that kept their store running.

“The oil and gas thing was the thing that made us say, ‘OK, we’re going to stay in business,'” Bruno said last week.

While the current demand for work clothes, which range from fire-resistant pants and shirts to a range of work boots from several manufacturers, “isn’t like it was a couple of years ago.” Bruno said the store is in a position to wait for drilling to return.

“Most of our inventory is paid for, and we’ve got some money in the bank,” he said. “Because of that, we’ll probably be able to weather the storm for the next couple of years until gas comes back.”

For at least one longtime supply company working in oil and gas, tenacity has been honed from a time that predates unconventional drilling.

Gary Bowers, owner of Producers Supply in Franklin Township, which provides an array of products and services to drillers in Greene and Washington counties and elsewhere in the Appalachian Basin, has been here before and isn’t worried about the return of the gas industry.

“We’ve been chasing rigs for 25 years,” Bowers said. “We’re not going anywhere.”