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U.S. Proppant Providers Raising Prices, Adding Railcars as Sand Demand Grows

U.S. proppant operators, which provide sand and ceramic materials to fracture onshore oil and natural gas wells, began raising prices and pulling railcars out of storage during the third quarter because of increased demand.

Fairmount Santrol Holdings Inc., Hi-Crush Partners LP, U.S. Silica Holdings Inc. and Emerge Energy Services LP all said they saw an uptick in business between July and September that is seen continuing into 2017. Houston-based Smart Sand also launched an initial public offering last Friday, and while it failed to raise much investor enthusiasm, it was seen as a sign of increasing confidence in the onshore drilling market.

"Our customers are talking about actually adding some crews even in 4Q2016, and certainly adding crews into 1Q2017," Emerge CEO Rick Shearer said during a quarterly conference call earlier this month. "We're very bullish, going forward, that our volumes and our pricing will continue to build."

Emerge experienced "a nice improvement for our sand business in the third quarter compared to the second quarter, and we see further improvement on the horizon for 4Q2016 and beyond. Our total sand volumes of 493,000 tons in the third quarter increased by 24% versus the second quarter, which outpaced the average U.S. onshore rig count growth of 16%..."

Exploration and production companies are experimenting with more sand per stage into their horizontals that are drilled and completed, something that "does not show signs of slowing down," Shearer said. "In fact, we have seen the overall industry trend accelerate," with 15% sand per well sequential growth from 1Q2016 and 35% sequential growth from 2Q2016. "We are now at a point in our industry where average sand consumption per horizontal well has tripled since early 2013, and our customers believe there is still room for more growth through longer laterals and greater loadings per lateral foot."

Chesapeake Energy Corp. executives earlier this year coined the term "proppant-geddon" to illustrate the boost to reserves they were seeing in the Haynesville Shale by adding more proppant per stage (see Shale DailyNov. 3a;Aug. 5). But it's not a Haynesville-only concept. Eclipse Resources Corp. is leading the charge for next generation completion designs for super laterals in the Utica Shale (see Shale DailyNov. 4). Anadarko Petroleum Corp. is testing a concept in the Permian Basin to double both proppant and fluid volumes (see Shale DailyNov. 1).

U.S. Silica Holdings Inc. sold 21% more sand volumes for its oil and gas segment (1.6 million tons) sequentially during 3Q2016, CEO Bryan Shinn said. That compares with a 14% improvement in the average U.S. rig count during the quarter, he noted.

Smaller Customers Back in Market

"We sold more tons in basin during the quarter, as we began to see some of the mid- and smaller-sized customers who rely heavily on our logistics network coming back into the market," Shinn said. “We sold 65% of our tons in basin during the quarter with our largest local sales occurring in the Permian, Midcontinent and the Northeast."

During the quarter U.S. Silica also opened two unit train transloads, with 18 of its 49 transloads now unit-train capable. The company also shipped a record 61 unit trains during the quarter, including the largest sand unit train ever, 156 railcars that carried almost 19,000 tons of white sand from Ottawa, IL, to Halliburton's Elmendorf South Texas Sand Plant outside San Antonio (see Shale Daily,Oct. 17).

"Completion activity is picking up, and our proprietary models indicate a 16% increase in working frack crews over the last 60 days," Shinn said. "Our open order book is the highest it's been since February 2015, and we're now hearing from numerous customers that their frack crews are booked to the end of the year. If the strong October start continues through the quarter, we expect an increased sales volume, and pricing will result in an improvement in our 4Q2016 profitability."

Fairmount Santrol CEO Jenniffer Deckard said third quarter results reflected "both the early signs of improvement within the overall oil and gas markets, as well as the ongoing trends that are particularly positive to proppants." Total growth in proppant demand "outpaced the approximate 15% increase in horizontal rig count." She credited "added proppant uplift from the completion of drilled but uncompleted wells, rig efficiencies and a continued increase in proppant intensity per well further extending the trends that we've seen over the last several quarters.

"As a result, demand for both frack sand and our value added coated proppant strengthened during the quarter. Raw frack sand volumes of 1.7 million tons represented a 35% increase over the second quarter and coated proppant volumes of 96,500 tons were 61% over the historically low levels per coated proppant in the second quarter."

A clear sign that demand is back is seen in the railcars used to ship proppant to onshore basins. At mid-year 2014, there were about 125,000 railcars in the industry, but by last year roughly half had been idled. During the third quarter, those idled cars were pulling proppant again, and many operators expect all of the railcars to return to service by 2018.

 "What a different picture we see from just six months ago," Hi-Crush CFO Laura Fulton said earlier this month. The Houston operator had slightly more than 600 railcars in storage at the end of September, compared with 1,900 six months ago, she said. It activated 550 railcars alone since July.

In September, Hi-Crush also restarted its Augusta, WI white sand facility after reupping a contract with Halliburton Co., which increased operating capacity from 4.7 million tons/year to 7.6 million.

"The restart of Augusta was a highly strategic one as it brought on additional capacity served by the Union Pacific Railway, which offers competitive access to the Permian Basin, where 40% of U.S. horizontal rigs are operating today," Hi-Crush CEO Robert Rasmus said.

Sand Demand 'Real and Sustainable'

The increased demand for sand is "in terms of the increased usage per well, increased usage per stage, is real and sustainable," Rasmus said. "What we're seeing on the pricing front is a reflection of just the basic supply/demand curve...We believe these are sustainable, and they're not just industry or short-term, weather-related concerns."

The fundamentals driving higher frack sand demand are expected to continue "through the end of the year and well into 2017," Fulton said. "Taking into account offsets from typical seasonal factors, we are expecting double-digit increases in volumes in the fourth quarter. We're positioning ourselves to improve prices, and we'll push to realize any increases where we can. We continue to expect periods and locations of tight supply/demand fundamentals, particularly for our 30/50 mesh grades and 40/70 mesh grades."

Getting proppant to customers as efficiently as possible was the impetus for Hi-Crush to launch an innovative logistics company earlier this month (see Shale DailyNov. 2). Hi-Crush has committed up to $17.4 million over the next year to 18 months to manufacture components under Proppant Express Investments LLC (PropX). PropX is developing last-mile logistics equipment to transfer proppant from railcars to drilling sites.

Fairmount's Deckard also pointed to higher demand driving higher pricing. The company "began to experience periodic capacity constraints for certain grades of sands, which supported our decision to implement price increases on northern white sand late in the third quarter," she said. “Increased third quarter volumes also played a significant role in improving overall cost efficiencies, particularly for our railcar fleet. At the end of the third quarter we had 2,850 cars in storage, a reduction of approximately 700 cars since the end of the second quarter and a reduction of 1,700 cars since the beginning of 2016."

Proppant pricing "is still at long term unsustainable levels, we expect the price increases implemented late in the third quarter to provide a positive impact in the fourth quarter," Deckard said. "Overall market fundamentals seem to be stabilizing and cautious optimism is the sentiment for 2017. Notwithstanding these positive indicators, we would expect to experience the effects of typical fourth quarter slowdown related to weather, holidays and tighter budget execution as our customers come to the end of their calendar years."

Regional Sands Versus Northern White?

While northern white sands, mostly from Wisconsin, continue to be the standard, regional sands are gaining market share given the transportation cost advantage. Encana Corp., for example, is testing cheaper brown sand in some of its proppant operations, including the Duvernay formation, and finding little degradation (see Shale DailyNov. 3b). On a per-well basis, it is saving more than $130,000/well as a result of using brown sand versus northern white.

The move to regional sands is an "important trend," Shearer said. "This comes at a time when some operators have been evaluating well designs primarily based on upfront costs instead of with the longer-term focus on well performance aided by sand quality. Two years into this downturn but with a recovery forming, we believe that regional sands have a place in the frack sand industry, mainly in areas of certain basins where the geology does not require the high-quality, high-crush strength of northern white sand. While some operators and pumpers will migrate back to northern white in a stable $50-60/bbl oil price environment, many of our customers never left northern white sands and will continue buying this great product."

Finer mesh sands remain in high demand, "but we are also seeing renewed interest for coarser products...We think coarse grades still have a bright future, and we stand by those comments because our customers continue to assure us that their return is a matter of time."

The industry likely has reached its bottom, but "we still have challenges to overcome before the industry can return to full health," Shearer said. "Essential to that recovery is moving away from unsustainable pricing levels that we experienced earlier in the year. There is no doubt that the further ramp-up in rig count forecasted by many operators and industry sources, coupled with higher sand intensity, will help set the stage for eventual price increases as higher-cost capacity returns back online to fill demand.

"In addition, we are no longer competing against the severe discounts seen earlier in the year because many of the smaller sand companies have burned through their stockpiles produced during 2015 and have not mined during the 2016 season. With winter around the corner, the tier one players, like us, who have been able to replenish inventory for their northern mines will be in a better position to capture share during the market recovery.”

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