The newest frac sand company, Covia Holdings, is also the largest
Frac sand production transitioning to local sources to eliminate $30-60 per ton railroad costs
New mines in shale plays coming online may create an oversupply of sand
The frac’ing revolution in the United States has sent ripples through the larger industrial economy. The abundance of natural gas unlocked from shale has turned the US into a net exporter of LNG and altered global trade flows, and a wave of capital investment in petrochemical facilities has flowed into the Gulf Coast and Houston area. Ethane, a heavier hydrocarbon isolated from methane during natural gas processing, has become far more abundant—it’s the primary feedstock for ethylene, the basis of polyethylene, the most common kind of plastic. Since the frac’ing boom began, the United States has been producing so many plastic pellets (‘nurdles’) that we’re exporting them to China to be turned into finished plastic goods and shipped back to American shores.
The complicated logistics of frac’ing, which has to accommodate the frequent movement of drilling equipment, rigs, sand, and water, has created opportunities for digital products like PropDispatch to automate sourcing, price discovery, and tracking.
And, of course, sand itself has been commodified in an entirely new way. First, vast mines in Wisconsin were the source for high-crush ‘white sand’ that would be brought south by rail to terminals in shale plays, and frac sand became a major category of freight for railroads. Union Pacific has hauled 14.4% more crushed stone, sand, and gravel in 2018 so far than it did by this time last year; BNSF’s stone, sand, and gravel volumes are up 11.8% year-to-date; Canadian Pacific grew its crushed stone, sand, and gravel volumes 20.8% in 2018 so far. Now, sand mining is shifting to locally sourced ‘brown sand’ located closer to oil production sites, and railroads like Union Pacific are giving guidance for reduced frac sand volumes in the back half of 2018.
There are essentially three categories of companies that supply sand: turnkey oilfield operators like Halliburton, Schlumberger, and Mammoth Energy Services that include frac sand as part of their offerings; privately held sand companies including Vista Sand, Atlas Sand, Black Mountain Sand, Preferred Sands, and Alpine Silica; and then there are the publicly traded sand companies. US Silica was the longtime industry leader, with a market cap of $2.1B, and other companies include Hi-Crush LP (market cap: $1B), CARBO Ceramics ($272M), Smart Sand ($227M), and Emerge Energy Services ($223.5M). Last month, a new frac sand giant was born out of a merger of Unimin and Fairmount Santrol called Covia Holdings, with a market cap of $2.27B.
Corporate documents from frac sand companies illustrate the changes the industry is undergoing. US Silica gave an investor presentation on May 30th in New York City that called for 2018 frac sand demand exceeding 100M tons, up from 66M tons in 2017 and 33M tons in 2016. US Silica said that advances in technology leading to much longer horizontal wells have also increased the intensity of sand use per well, and they noted a drive to reduce cost per ton of sand by moving to regional sand. US Silica claims to be “uniquely able to redirect product flow nationally to maximize margins”: it said that 85% of rigs are within 50 miles of its transload terminals.
Other industry data attests to the explosive growth of frac sand demand. Hi-Crush LP reported higher revenues in Q4 2017 ($216.4M) than in all of 2016 ($204M). Hi-Crush thinks that increased use of ‘Permian Pearl’ sand, the type produced in its Kermit facility at a rate of 3M tons per year, will begin displacing lower quality regional brown sand as soon as next year.
On June 28th, Stifel’s Michael Baudendistel hosted a conference call featuring Taylor Robinson from PLG Consulting, who spoke about frac sand and bottlenecks in Permian crude takeaway capacity. Robinson said that while legacy sand mines are currently running at capacity, new mines coming online in the next year will create an oversupply and crash the price.
“We still are in a very tight sand market right now,” said Robinson. “It is very tight to get sand from the traditional Wisconsin/Illinois mines to the various sand places. In the Permian, of course, there’s a major shift going on right now as actually 11 mines are now in production. Market demand’s probably going to hit over 100 million tons this year, so just tremendous growth over the last two years. With the tight supply right now, pricing is remaining strong and still somewhat inflationary. I think things are ready to change there.”
Robinson predicted that oversupply would hit the frac sand market later this year. “All the legacy mines are running full out,” Robinson said. “You’ve got more Permian mines coming on—could be as many as six to eight more this year. And not only Permian, but Eagle Ford, Haynesville, and SCOOP/STACK are going to have more mines starting production. Some will start later this year, and especially in 2019 for the SCOOP/STACK. They’re probably further behind than anyone, but Eagle Ford’s got another five, six, or even eight mines coming online here in the next year or so. So there is lots of local sand coming online.”
“Finally, I believe local sand is going to spur higher-intensity wells,” Robinson concluded. “So as there’s cheap local sand available later this year and next year, folks will put more sand down because the payback is quite good.”
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