Replies to post #17261 on Value Microcaps Junior Energy

[Bobwins]

Article about frack sand I found on Stockhouse.com

While 2017 may not be a stellar year for oilfield services in general, the sand proppant those companies use in hydraulic fracturing may enjoy its best time yet.

With crude oil prices appearing stable at more than $50 per barrel, exploration and production (E&P) companies are gaining confidence and spending more money on capital expenditures (CAPEX). Increasingly, analysts and investors are bullish on the grain’s prospects as rig counts climb and E&P companies pour ever more sand downhole to accelerate production.

This phenomenon has been the single biggest driver of improved well production in the U.S., analysts at Raymond James (RayJa) said in a January note to investors. While the U.S. rig count plummeted almost 75 percent during the last two years, sand demand dropped off about 40 percent.

image: http://images.rigzone.com/images/news/misc/Rig-count.png


Proppant use in the United States alone will reach above 2014 levels despite the diminished activity of 60 percent fewer rigs, RayJa said. Between the Permian Basin, Eagle Ford and Bakken, proppant intensity (pounds per lateral foot) has increased more than 50 percent since the beginning of 2014.

“We expect to see U.S. proppant demand this year set all-time highs despite fewer than half the rigs running, relative to the previous 2014 sand demand peak,” RayJa said. “Furthermore, with our expectations for an increasing U.S. rig count over the next few years, U.S. sand demand in 2018 should be at least 150 percent higher than 2016 – up to a whopping 80 million tons.”

image: http://images.rigzone.com/images/news/misc/Proppant-demand-chart.png


At Tudor, Pickering & Holt (TPH), analysts with an already robust outlook on frac sand demand have revised their expectations upward.

In early 2016, TPH ran a basin-by-basin demand model and estimated 2017 and 2018 proppant demand would be up to 200 billion pounds (Blbs). But that cap was met by the beginning of December, leading the investment bank to revise its forecast for 2018 to 240 Blbs – more than double the peak annual U.S. demand of 108 Blbs.

image: http://images.rigzone.com/images/news/misc/Hi-Crush-sand.png


As sand demand grew during the last year, shares of Hi-Crush Partners (NYSE: HCLP) has surged 356 percent year-over-year. SOURCE: Hi-Crush Partners

Consequently, proppant companies began 2017 with sound liquidity. This year, the concern will be securing enough supply from their plants to avoid the shortages of 2014. Top sand companies – U.S. Silica, Fairmount and Hi-Crush Partners LP raised $600 million through equity sales in 2016 – signaling strong investor conference, analysts at Moody’s Investors Service said.

As Karen Nickerson, vice president and senior credit officer at Moody’s, explained, frac sand benefits from two types of demand. First, fundamental demand increases with more wells being drilled and fracked. Second, E&Ps learned that with enhanced technology, increasing the intensity of the proppants generates better well production.

“The proppant intensity has really helped the sector over the last couple years, when there was a fundamental decline in demand because wells were not being drilled and the rig count came down,” she said.

Karen Nickerson
image: http://images.rigzone.com/images/news/misc/Nickerson_Karen-10_06_th.png

Karen Nickerson, Vice President and Senior Credit Officer, Moody's Investors Service Vice President and Senior Credit Officer, Moody's Investors Service
With both sides of demand in play, proppant companies will be in a position to raise prices. But it’s unlikely to be much, Nickerson said. Sand mining and selling tends to be profitable at a $30 per ton price point, she said.

“You have to understand that although some companies saw a modest increase in the price of their sand, the sand prices are still very, very, very low,” she said. “Even if we see some sand price increases, it’s still at very low levels, which will constrain earnings to some extent.”

Still, RayJa projects sand prices could at least double.

New-build and higher cost mines that were idled or postponed may enter this market during the next 24 months, which would require an increase in sand price to incent reactivations, RayJa said in a January note to investors.

“This movement up the cost curve should push sand prices at least 60 percent higher to the ~$40 per ton range (at the mine) over the next 18 months,” RayJa said.

What’s more, potential logistical and reactivation constraints could push prices to 2014 levels. Where sand costs about $25 per ton today, the price point reached $70 per ton prior to the downturn.

And where E&P companies and oilfield services have struggled to avoid bankruptcy, the proppant companies have been relatively insulated. Most had no near-term debt maturities, or like Fairmount, Nickerson said, they worked with lenders to pay down debt or extend deadlines.

“Right now, the proppant companies have very good liquidity positions. They all have cash on the balance sheet and none of their debt is coming due before 2019,” she said. “That gives them a lot of runway in terms of focusing on operations and not having to focus on balance sheet issues.”


Read more at http://www.stockhouse.com/companies/bullboard?symbol=v.sns&postid=26118381#y5l375s7T2kYssEc.99

[jasonak]

Nice write up. I bought a few. Thanks for idea.

[Swick984]

Bob,

Thanks for the info on SND. I have about a $15 avg. on my shares, which I felt good about until Thursday's drop. Is there anything you see out there that has caused this drop across all Frac Sand companies? There was significant weakness after SLCA reported their Q4 report and suggested some healthy capacity increases which spooked the markets. Since then frac sand stocks have been under some heavy selling pressure. SLCA reports next week. Do you think some of this weakness is based on fear or a similar sell-off after their Q1 results?

With oil holding above $50 and rigs being added weekly, I'm a bit surprised by the recent weakness here.

Thanks

[beigledog]

Bob...thanks for this excellent post last week. I looked at the frac sand guys a couple of years ago, but I don't really like the barriers to entry for the industry. Unlike say, a copper mine which can take as long as two decades), it seems like anyone can just throw up a frack sand mine in about 6 months.

What do you think about the move to regional sands? US Silica has made two regional sand acquisitions in the last couple of years (NBR last year) and claim that regional sands (which are thought to be lower quality or brown sand) have gone from ~16% to 34% (and even said 41% in their NBR acquisition presentation). Northern white is losing share to the cheaper stuff.

SLCA had a presentation at their investor day about regional sands that you can check out here:

http://phx.corporate-ir.net/phoenix.zhtml?c=247793&p=irol-presentations

[Bobwins]

SND -.12 to US$11.98 Sold out today. Bad timing, bad kharma, bad juju, BAD whatever! Picked the wrong time to go contrarian. Peaked at $22 in March due to enthusiasm over OPEC cuts, chopped in half over pessimism about US shale production overwhelming OPEC cuts.

Oil inventories continue high in the US. Demand is picking up but not enough to work off the inventories anytime soon. I was expecting more demand but at this point not going to wait around to see if I was right.

Price says I was wrong. Damn, I liked the mgmt and their approach. May come back to SND when outlook improves. Maybe Putin will voluntarily reduce production by a couple million bpd! Hey, I can dream, right...