Nearly 40% of the proppant capacity in the U.S. drilling industry, an estimated 20 million tons of sand and resin-coated proppants (RCP), have been idled or reduced over the past year, leaving little wiggle room for growth this year, industry suppliers lamented during recent quarterly conference calls.
Fairmount Santrol Holdings CEO Jenniffer Deckard led a conference call earlier this month to discuss fourth quarter and full-year 2015 results. She estimated that proppant intensity, signifying the amount of sand/RCP used per stage per well could increase by 20% from 2015 if producers attempt to squeeze more natural gas and oil out of their wells through hydraulic fracturing (fracking).
But to get that kind of growth, it will require more wells. Proppant volumes used in U.S. onshore basins were higher for Fairmount in December than anticipated, but it’s still tough for customers, which continue to ask for price concessions.
Fairmount’s proppant volumes totaled 1.3 million tons in 4Q2015, down 4% from the third quarter. On the positive side, the decrease compares to a 17% slide in the North American rig count, Deckard said. Sand volumes in 2015 were off 5% from 2014, while RCP volumes fell by about half.
Like its peers, Fairmount has improved efficiencies and reduced costs throughout the business, which has included consolidating operations. The workforce was reduced by about 8% during 4Q2015, which resulted in a total 20% employee reduction in 2015. In the past year, eight facilities were idled and 3.4 million tons of total sand capacity was taken offline.
“We have now consolidated much of our frack sand production into our lower-cost optimally located Wedron, IL, facility,” where capacity was set to double (see Shale Daily, March 23, 2015). By mid-year, Wedron is expected to have 8.5 million tons of annual slated capacity.
Fairmount’s railcars in storage increased to about 4,600 during 4Q2015, but since the start of the year, cars have begun to move out of storage.
“Through the end of February, we have reduced the number of cars in storage by approximately 1,000 cars, a more than 20% reduction,” Deckard told analysts.
During the first two months of 2016, Fairmount’s proppant solutions volume share improved from fourth quarter levels. Also in January and February, the company experienced “relatively flat to small price declines across all products, which indicates to us that the market is recognizing that pricing for the proppant industry is nearing the bottom, and that there is little flexibility to provide additional pricing concessions,” the CEO said.
“While these early 2016 trends are encouraging, we have all seen industry fundamentals continue to deteriorate since the start of the year, and we expect further pressures as we move further into 2016. We do continue to believe that the increased use of proppant per well will continue to somewhat offset the impact of fewer wells being drilled.”
There’s no doubt that more producers are using fracking in their horizontal wells. For instance, about half of current U.S. crude oil production comes from fracked wells, according to the Energy Information Administration (EIA). In 2000, close to 23,000 fracked wells produced 102,000 b/d of oil, making up less than 2% of the national total. By 2015, the number of fracked wells had grown to an estimated 300,000 with production of more than 4.3 million b/d, making up about 50% of total U.S. oil output.
The new oil production has primarily come from shale and other tight rocks in the Eagle Ford formation and Permian Basin of Texas, and the Bakken and Three Forks formation of Montana and North Dakota, EIA said.
“Double-digit growth in proppant per stage and stages per foot is expected to drive increases in proppant intensity of plus-20% in 2016,” Deckard estimated. “Drilled but uncompleted wells or DUCs, also offer added potential for proppant demand. According to industry analysts, there are currently between 4,500 and 7,700 DUCs in inventory.”
As prices show signs of recovery but as DUCs are moved out of inventory, the increase in proppant use “will likely precede the rig count increases,” she said.
“It’s certainly dependent on the market...All of those things are positive, but they’re positive against the rig count...We’d have to have rig counts in the neighborhood of 800-900 to be flat without DUCs…” The rig count has fallen sharply, but if the average rig count is about half of 2015’s average, “the 625 rig count range, we could be seeing a decline in the market from 2015 levels of 50 million tons of proppant, to a level of 30 million to 40 million tons, depending on DUCs...
“Those are just factors that go positively against a declining rig count...Oil prices, and then the rig counts, will dictate what the market proppant usage is.
As to why business was a bit stronger early this year, Deckard said she thought the industry had its sights set on oil priced at $40-45/bb and business already was scheduled to be completed in the first quarter.
“As we all know, we saw $26, $27 oil. And so, we would expect that we’re going to start to see some further pressure than we’ve seen in January and February...The December outlook already had some completions on the books and...went forward in the first quarter, prior to some more decline…”
U.S. Silica Sees Industry Consolidation
US Silica Holdings Inc. CEO Bryan Shinn, during his company’s quarterly results conference call, said a big priority is to maintain customer relationships and remain as flexible as possible. But the hurdles are huge. Exploration and production (E&P) investments are falling for the second year in a row, and guidance implies that the rig count also will continue to decline.
“Recent analyst reports and our discussions with customers suggest that the rig count could potentially fall another 30% to 35% during 2016,” Shinn said. “When and where the rig count finally bottoms is certainly uncertain. But we expect continued low oil prices this year with downward pressure on both our volumes and profitability in oil and gas.
“Moreover, excess rail cars continue to be a significant drag on our earnings. Approximately 40% of our 7,000 railcar fleet is idled at the present time.”
The plan going forward is to control what it can in the short term and create a “clear path to position our company for long-term success,” Shinn said.
“As I've stated often in the past, we believe our industry is ripe for consolidation,” and merger and acquisition activity “is still in the mix in terms of our capital allocation plans…”
Unlike Fairmount, which has seen a slight improvement in business since the start of 2016, Shinn said business is down “more than 20% since Dec. 31...And the announcements on E&P budgets being down to say 40-50%, in some cases more, we certainly are feeling some pricing pressure from our customers. The discussions we're having with customers now though is, that ‘look, there's really not that much more to give.’ So I think there's probably a few percent more pricing pressure that we might see here in 1Q2016.”
The industry, however, is “rapidly reaching a point where there's just not a lot more to give. And customers, to their credit, I think are starting to recognize this. But they're in a tough spot as well with service companies. They're being pressured to the extreme these days by the energy companies. So we'll see how it plays out. But I would say down a few more percent [decline] in 1Q2016 would not be unreasonable.
By US Silica’s estimate “at least 20 sites” are offline across the industry “and we estimate that 15 million tons to 20 million tons of capacity, or probably close to 30%, has actually come offline already. We think there's probably more to come there. So I think that will help. But...if you look at the demand versus capacity, we're still not in a great position.
“I would say that as an industry we're probably running right now at maybe 60%, something like that. So there's still a lot of overcapacity out there. But we do see a lot of the higher cost guys already out and more coming out all the time.”
Proppant intensity is higher now -- but for now long, he’s unsure.
“It’s all about the number of rigs, the efficiencies, the number of stages, sand per stage and all that,” he said. “Our view is that we'll still see sand per well up probably 8% to 10%...I think the challenge is going to be how far the rig count falls and how many crews come offline and when you consider...all those puts and takes, I think we're going to see probably declining sand demand in 2016 versus where we exited 2015 at a macro level for the industry.”
Hi-Crush Partners Estimates More Sand Per Well
Hi-Crush Partners LP CEO Robert Rasmus said the so-called “fracation” in the final weeks of 2015 didn’t help the poor business climate.
“Like the rig count and commodity pricing, sand prices exited the year at low points,” Rasmus said during a fourth quarter conference call. “Clearly, our business is exposed to market forces and related rig count trends, but because sand is not required until the completion phase of the process, it is not a one-to-one relationship…
“Essentially, the industry is drilling more wells with fewer rigs, completing wells quicker and more efficiently than ever before, and pumping more sand downhole...This increase in sand intensity continues to be a partial offset to some of the pressures we are seeing today and remains a key driver of frack sand demand over the long-term.”
There is “clear evidence of the increase in sand intensity per well,” Rasmus said. “However, the bottom line is that frack sand and its demand is all about well completions...And while we did not see the decline that many had feared, our operations were impacted by greater than normal seasonal declines.”
Pricing hasn’t deteriorated into this year, but “things have not improved,” he said. “Against this backdrop, we anticipate that the lower levels of activity we experienced late in the fourth quarter will continue.”
Proppant prices, however, “have little, if any, further room to fall. Our customers in E&Ps have echoed this sentiment in recent weeks, suggesting that there is not much additional pricing to take from service and sand providers, following a decline in sand prices of, in some cases, as much as 60%.”
The proppant suppliers are working with customers to maintain market share, Rasmus said. “But we also believe current frack sand pricing for the industry is unsustainable. To address this reality, we recently began turning down orders as we focus not just on gaining market share but ensuring that we sell our sand profitably in this challenged environment, minimizing losses and maximizing cash flow today and into the future. We believe the industry's cost focus will shift to process improvements.”
Hi-Crush has idled its Augusta facility in Eau Claire, WI, closed or idled some of its low-volume distribution terminals and closed administrative offices, reducing the workforce by 23%.
“We are doing more with less, and are continuing to search for ways to take cost out of our operations both permanently and in response to current needs in the market, all with an unchanged commitment to customer service and reliability,” Rasmus said.
More attrition is expected in the the proppant ranks.
“The longer this downturn extends, the more capacity we expect to see shuttered…” There’s “very limited visibility for 2016. One, since the beginning of the year you've had a continued decline in the rig count. You've had a continued decline in oil and gas prices. You've had a continued decline in well completions. You've had a continued decline week over week in terms of new well permits. So that gives a fairly low visibility for 2016