Hydraulic Fracking Techniques Creating Unprecedented Demand for Silica Sands
The demand for frac sand has exploded in the past several years as thousands of oil and natural gas wells are being stimulated using the hydraulic fracturing process. A hydraulic fracturing job on one well can require a few thousand tons of sand. This surge of specialized drilling has created a billion dollar frac sand industry in a very short time. Frac sand (proppant) use has nearly doubled since Q3 2012:
Recently, one of the largest Silica Sands producers, U.S. Silica Holdings, Inc. (NYSE: SLCA) announced the delivery of a record-breaking 150-car unit train carrying over 16,500 tons of U.S. Silica White® frac sand from Ottawa, IL to a transload facility serving the Permian Basin.
Although the U.S. land rig count has declined during 2015 as a result of lower oil prices, large volumes of sand continue to be required as current completion designs for wells demand increased volumes of sand per stage and more stages per well. It is estimated that sand usage per well has increased by 26% from the 3rd quarter of 2014 to the 2nd quarter of 2015, according to a recent report from PacWest Consulting Partners and that trend appears to be continuing.
The reason for this stunning surge in sand usage is that sand and ceramic (known as proppants) keep shale fractures open, thereby allowing more crude oil to flow. Fracking wells reach peak production quickly and then enter a rapid rate of decline, by achieving increased production during the first year the well is more likely to return a higher total recovery over the lifetime of the well.
The trend is undeniably strong and the future looks bright for commercial silica sands producers. Especially those producers who have high velocity logistics networks that are able to meet customers’ needs at the necessary scale and speed.
The silica sands space has been devastated during 2015 as rig counts have been in sharp decline. However, there is a good chance that the bad news has been sufficiently, or excessively, discounted. The fact remains that strong producers are continuing to utilize proppants in record quantities in order to optimize well production. There is one major player in silica oil & gas proppant space, US Silica Holdings (NYSE: SLCA) and many mid-tier players such as FMSA, EMES, and HCLP.
As the mid-tier and major players look to optimize costs through scale and geographic diversity there are is only one small cap on our radar: Select Sands (TSX: SNS). Select Sands Arkansas asset is 650 miles closer than Wisconsin mines to major Texas and Louisiana shale-plays offering savings in transportation costs to oil producers, which of course are trying to squeeze costs right now.
The Preliminary Economic Assessment (PEA) on the Sandtown project suggests total mine revenue of US$767M, with strong potential to become larger. Currently the market cap is $13M US.
SNS has exhibited substantial relative strength during a challenging year for the silica explorer/producer space suggesting strong corporate developments are taking place and investors are taking interest to their valuation.
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