Volatile oil prices, Middle East terrorism, and the falling value of Russian currency all pose threats to Wallingford drilling technology maker APS Technology, but that’s not stopping the company’s management from projecting another double-digit revenue growth year in 2015.
Even though falling oil prices have slowed domestic oil exploration, APS Technology expects to surpass the $200 million revenue mark for the first time this year, thanks to international growth and major procurement contracts with some of the U.S.’ largest oil companies.
“The ability to supply this equipment is something only very few can do and really sets us apart,” said William Turner, APS’s CEO and founder.
Founded in 1994, APS manufactures measurement while drilling (MWD) technology that communicates to crude oil exploration companies exactly what direction they are drilling in and what kind of substances are around the drilling bits.
The company competes with oil heavyweights like Baker & Hughes and Halliburton that provide MWD services to the likes of Exxon Mobil and BP. But APS has found a fruitful market niche by actually selling MWD equipment to those in the oil field — rather than just providing services — and targeting smaller companies.
APS has averaged 40 percent annual revenue growth since its founding, making it the leading independent supplier of MWD equipment, said Turner, a former Baker & Hughes executive. APS has received the Marcum Tech Top 40 award for 12 years in a row as one of the fastest growing companies in Connecticut. It employs 420 worldwide including 320 in the Nutmeg State.
Turner, though, expects growth to slow somewhat this year to around 30 percent. With oil prices falling, fewer domestic companies have the capital to buy new equipment, he said, and even though its international business will keep APS in the black, volatile world politics play a role in its success overseas.
“This year is going to be a difficult year for anyone in the oil business,” Turner said. “That impacts us for sure.”
Oil impact
Crude oil prices hovered around $53 per barrel in early February, roughly half of the average price for the last five years, according to the U.S. Energy Information Administration (EIA). While falling oil prices have led to a steady drop in gasoline prices to nearly $2 per gallon, they also have cut into oil companies’ margins.
EIA predicted in its Feb. 10 short-term energy outlook that oil prices would stay around $55 per barrel for much of the first half of the year before rising to $67 per barrel in the fourth quarter.
Gas prices should fluctuate accordingly, to average about $2.33 per gallon in the U.S. for regular unleaded, although Connecticut prices are typically 20-30 cents higher because of taxes and logistics.
Tim Hess, lead analyst for EIA’s short-term energy outlook, said lower oil prices will have a continued impact on production, although not as much as prices would indicate. The number of oil rigs operating in the U.S. is down nearly 18 percent over the past year, he said, but these rigs tend to be the older and less efficient ones so the level of production hasn’t fallen at the same pace.
“The growth in crude production … is not going to be as robust as it has been, but it is not going away either,” Hess said.
EIA does expect U.S. oil production to drop from 9.3 million barrels per day in January to an average of 9.2 million barrels per day for the year. However, with continued strong supply in the international market, prices will remain in check.
Bullish long-term outlook
Even with lower prices, oil exploration is a major business opportunity with plenty of money to be made, Turner said. About 95 percent of APS’ business is international, where long-term contracts are more common and supply a steady stream of revenue.
Strong international business plus the potential to land a major contract with a national oil company to sell MWD technology will help APS keep up its double-digit annual growth, Turner said.
APS sells its basic MWD package plus eight add-on products to aid in the drilling process, so these contracts can add significantly to the company’s bottom line. The add-on products include items like vibration sensors and communication devices that give a driller more information about what is going on beneath the surface.
“These things get into how efficient is the drilling operation,” Turner said.
Dan Socci, CEO of South Windsor-based Ethical Chem, another oil drilling services company, said his firm hasn’t seen a significant reduction in business from falling crude prices.
Ethical Chem provides environmentally safe substances that remove organic materials from drilling operations to make drilling more efficient. The company ships products to 30 U.S. oil producers and acquired its technology when it bought Bloomfield chemical firm VeruTek in September.
“When people have blockages in their well, they want their oil to flow better, whether the price of oil is at $50 or $80 per barrel,” Socci said. “You do have some producers that in order to be profitable, they need oil to be above a certain price per barrel … but that has not affected us.”
Global affairs
Beyond the price of oil, world politics can impact the bottom line, said Turner.
APS sells to oil producers in the Middle East, particularly Iraq, and last year saw all of that revenue dry up because of concerns over heightened terrorist activity from ISIS, Turner said.
This year, APS is anticipating its Russian business to shrink significantly, as the falling value of that country’s currency — the ruble — puts pressure on the Russian economy and the profitability of international companies operating there. The value of the ruble compared to the U.S. dollar has fallen nearly 50 percent over the last year.
“This is going to be a tough year for us in Russia,” Turner said.
Despite all this, Turner expects another growth year, particularly because the complexity of manufacturing MWD technology creates a high barrier to entry, leaving APS with very little competition in its market niche, he said.
“We still have an ambitious development program and an ambitious product launch program to keep us at the forefront of the industry,” Turner said.
