Bri-Chem Corp. eyes the massive U.S. fluids market
Shale gas, tight oil provide market opportunity
The decision to start manufacturing steel pipe out of a modestly sized warehouse on the southeastern outskirts of Edmonton was anything but conventional for Bri-Chem Corp. After all, the Acheson-based wholesaler of drilling fluids and, through subsidiary Bri-Chem Steel Corp., steel pipe, tubing and drill casing, didn’t initially have access to a mill.
No matter. Officials at the company ordered one from China. They partnered with Wuxi Huayou Special Steel Co., a Chinese manufacturer based in Jiangsu Province, early last year to create Bri-Steel Manufacturing Inc. Bri-Chem brought the sales and marketing expertise; with a 30 per cent share in the new company, Wuxi contributed equipment, training and engineering know-how related to the firm’s novel thermal expansion manufacturing process.
The decision seems to have paid off. In June, just six months after the partnership was announced, Bri-Chem shares began trading on the Toronto Stock Exchange. By November, the firm was trading at $3 and change, at the high end of its 52-week range.
Bri-Chem chief financial officer Jason Theiss says the jump from wholesaling to manufacturing pipe fits with the company’s long-standing emphasis on doing more with less. Sales from the pipe mill topped $182,000 through the third quarter of 2011, a token amount compared to the $7 million in quarterly sales earned overall by the steel division. While it works to secure sales for 2012, the firm is predicting a strong performance – based on a forecast 16 per cent increase in fourth-quarter drilling activity in Western Canada – from its fluid business.
Bri-Chem began wholesaling drilling fluid in Western Canada in 1985 via a subsidiary called Bri-Chem Supply Ltd. The business was simple: buy drilling fluid products from manufacturers and resell them to the oil and gas industry. The firm boasts 17 warehouses spread throughout the Western Canadian Sedimentary Basin, from the remote reaches of the Horn River shale gas formation east to the sprawling Bakken “tight” oil play in Saskatchewan. The idea, Theiss says, is to supply “the right product at the right time.” Clients today include Trican Well Service, Canadian Energy Services LP and CCS Energy Services.
Steel is a comparatively new venture. In 2008, Bri-Chem paid $10.9 million for Weifang Steel Canada Ltd. and began wholesaling steel pipe to complement its fluid sales. The purchase proved to be a shrewd way to offset seasonal fluctuations in drilling activity. “When we looked at that acquisition back in 2008, it was a very similar type of business model [to the fluid business] – low employee count, low overhead, highly efficient, very scalable operations.”
Today, the mill acquired via the Wuxi partnership produces four to six truckloads of pipe per day ranging from 14 to 36 inches in diameter. The novel thermal expansion process involves heating the pipe to around 650 Celsius and expanding it to a previously calibrated size. The end product is a “seamless” tube that requires no welded joints. Theiss expects the mill to operate at full capacity this year. He says the process will yield 10,000 and 15,000 tonnes of large-diameter product annually.
Manufacturing pipe in-house has another advantage. As a wholesaler, Bri-Chem regularly dealt with damaged pipe imported from abroad. “The problem with large-diameter pipe is you can’t store it in a boat very easily and you can’t ship it overseas very easily,” Theiss says. “It’s got to go bulk. It can’t go in containers, so it bounces around.”
Fluid sales are still an integral part of the business, posting $53 million in third-quarter sales. Fluid consumption has been on the rise across North America, Theiss says, as companies adopt advanced drilling techniques to tap new geology. “What we’ve seen in the past years, the well count isn’t high, but the meters drilled have been a lot deeper, a lot longer, more horizontal, which consumes a heck of a lot more fluid for us,” Theiss says.
Acquisitions continue. In June, Bri-Chem paid US$2.5 million for Denver, Colorado-based Stryker Ltd., a transportation and fluid distribution company. The purchase fits with a U.S. expansion strategy to build a distribution business aligned with activity in unconventional resource plays from Texas to the U.S. northeast in Pennsylvania. “Breaking into the U.S. market is a lot more of a challenge,” Theiss says.