A Surprising Turnaround in Frac Sand Demand
Frac sand (proppants) have seen a surprise turnaround in demand projections during the first half of 2016. Many investors and industry observers left this segment of the oil market for dead at the beginning of the year, however, a perfect storm of factors has caused a surprising turnaround in this niche oil services segment.
A recent report from Tudor Pickering highlighted some of the reasons for the turnaround in frac sand demand (and consequently higher price for frac sands):
White sand pricing at the minegate should reach US$65/ton+ vs. the current US$15-20/ton.
2017 demand could be well above 2014 levels and 2018 sand demand could end up ~2x 2014 levels.
Well operators are using more proppants per well than initially forecast as they increase lateral length and push proppant per lateral foot well above current levels.
Proppant per horizontal well from ~8mm pounds today to ~11mm pounds in 2017 with further upside in 2018 and beyond.
With activity increasing in the Permian Basin proppant demand is expected to increase significantly as the Permian catches up with other basins in terms of proppant usage.
This unexpected surge in proppant demand could cause logistics issues across the oil&gas space as operators scramble to get a hold of enough sand to execute their high intensity frac driven field development plans.
According to Brandon Dobell, an oil & gas analyst at William Blair, sand usage overall should rise even if oil prices stay within a range of $40 to $60 a barrel because drillers are now using two to three times more sand per well than they were three years ago. One only has to take a look at a chart of SLCA (U.S. Silica) to get an idea of how investors have been caught off guard by the rapidly changing dynamics in the frac sands market:
SLCA shares have nearly tripled in less than four months as investors have rushed to benefit from surging frac sands prices in a supply constrained environment.
A smaller frac sands player, Select Sands (TSX-v: SNS), is uniquely positioned to benefit from the rapidly changing dynamics in the frac sands market. We caught up with SNS CEO Rasool Mohammad this week and he couldn’t be much more optimistic as to SNS’ prospects in the current environment:
“SNS is well positioned to take advantage of this turnaround in the sand pricing! We are hearing from energy customers as of today. Our industrial sales are increasing with a healthy gross profit. ” ~ Select Sands CEO, Rasool Mohammed
With one of the largest silica sands resources in the U.S. uniquely positioned near the heart of the U.S shale oil industry (Arkansas) SNS appears to be in the right place at just the right time as U.S. shale oil springs to life again.
The SNS chart has been forming a broad based bottom since January and a breakout above ~.31 would quickly target .40+:
To summarize, frac sand demand is surging at a time in which most producers are ill prepared logistically to meet demand. Select Sands is uniquely positioned to seize the opportunity presented by a V-shaped bottom in crude oil and well operators increasing the lateral length of producing wells. Select Sands CEO Rasool Mohammad couldn’t be more confident with how his company is positioned:
“Due to increased demand from our repeat industrial customers, our limited production runs continue to get larger. Additionally, with no debt and no logistics restraints, we are poised to deliver a high quality sand, very quickly to meet the additional growing demand from the oil and gas market we are seeing in the market today.”
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