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Frack Sand Prices Up on Record Demand and Northern White Sold Out, Says Emerge Energy

Emerge Energy Services LP raised prices for contracted and spot sand customers by 3-5% beginning in the second quarter on record market demand for proppant in the U.S. onshore, executives said.

“We do not see the tightness in the market slowing down, as many of the in-basin plants continue to fall behind schedule, and the railroads have not fully corrected the service shortfalls,” Emerge’s Rick Shearer, CEO of the general partner, said during a first quarter conference call.

“With these challenges, and the record market demand for sand, we are essentially sold out of northern white and in-basin sand for the remainder of this year and beyond.”

Proppant intensity also continues as operators push lateral lengths longer and proppant loadings higher.

“While we may not experience the rapid intensity growth we saw from 2016 and 2017, we still see proppant per well increasing over the next two years, primarily driven by longer laterals.”

Exploration and production companies “are actively seeking contiguous acreage to execute attractive drilling plans that now often entail two-mile horizontal sections, compared to one-mile a few years ago,” Shearer said.

“Because of these longer laterals and the increase in rig count, we think the industry frack sand demand for 2018 will exceed 100 million tons, and several customers are bullish on 2019 industry activity levels, with 15%-plus growth projections.”

The “appetite for sand is strong, and the competitive new in-basin supply is not coming online as quickly as initially projected. So, we see prices continuing to move up at this point in the cycle.”

More Sand To Eagle Ford

Subsidiary Superior Silica Sands LLC days ago began shipping sand directly to the Eagle Ford Shale in South Texas from a newly opened facility in San Antonio.

"While we have been shipping frack sand at the San Antonio site from our old production circuit for over nine months, our new dry plant has now officially begun shipping frack sand," Shearer said.

“We are working hard to ramp up the plant's output to reach full capacity of 2.4 million tons per year, as limited by our current permit. The construction of our new wet plant should be completed by July, which will allow us to achieve full production during the third quarter."

Progress also is being made to obtain a New Source Review (NSR) air permit that would allow total capacity from the San Antonio plant to be increased to 4.0 million dry tons/year.

“The public comment period for the new permit expired last week with no major comments or complaints,” Shearer said. “As a result, our confidence of obtaining this permit by the fourth quarter has increased.”

Shearer shared a microphone with Chairman Ted Beneski and CFO Deb Diebert to discuss first quarter results.

The company increased its total sand volumes by 7% sequentially in 1Q2018 to 1.45 million tons, a company record, and increased frack volumes by 8%. Total volumes were up 20% year/year.

The company “faced significant obstacles in the form of poor railroad service and extreme winter weather” during the quarter, Beneski said. “However, we overcame these issues and delivered positive results, which is a testament to our newly enhanced rail shipping outlets, and the improvements made by our Texas in-basin plants.”

Railroad providers were diversified, and Emerge increased its exposure on the BNSF Railway, while the Canadian National Railway Co. “continues to struggle fulfilling orders,” he said.

In addition, the Kosse, TX, sand facility began responding to higher proppant demand and increased production by 50% from 4Q2018. The existing San Antonio production plant also produced 74% more frack sand sequentially.

More Take-Or-Pay Contracts

So far in the second quarter, there are “encouraging signs of increased prices and record demand,” Shearer said.

Customers “are rewarding us with new take-or-pay contracts that we expect to cover the entire 2.4 million tons per year of current capacity” from the new San Antonio plant. “While some of the contracts are signed, we're in the final stages of executing a number of contracts where we already have verbal commitments.

“Demand for our San Antonio frack sand is so strong that we are targeting a contracted rate of more than 80% of the entire 4 million tons per year capacity under the new NSR permit we expect to receive.”

Sand demand in the market remains positive, and “demand continues to outstrip supply. We are turning down northern white orders due to ongoing constraints from the railroads, and customers have been patiently awaiting the start of our new San Antonio plant.

“Price increases materialized in the first quarter as expected, but we sold a higher mix of lower priced coarse grades compared to the fourth quarter. Overall, our average selling price increased by 1%,” but he said if the northern white sand mix “had held constant between quarters, the price increases on the fine grades would have translated into an overall increase of 3% or more.”

The market was dominated by coarse sand grades at the height of the drilling boom in 2014, but operators have moved to fine sand.

“However, we are seeing signs of increased 30-50 demand now, not because of fine products shortages, but because customers are continuing to optimize well designs by experimenting with grade changes,” Shearer said. “A new design in several basins implements 100 mesh initially to open up as many small fissures as possible, and then uses 30-50 to widen the open fissures and increase conductivity.

“In-basin sand deposits do not have sufficient amounts of 30-50. So, northern white sand must fill the demand for the 30-50 preferences. We and our peers have consistently declared that northern white sand is not dead, and the evidence to support this view continues to mount.”

Rail services slowly are improving since they bottomed out in February, he said, but Emerge still was proactive in seeking out new outlets to reduce its dependence on certain carriers.

”The company also is looking to expand its footprint and is evaluating new sites in Canada, the Northeast and the Bakken Shale.

“The Uinta Basin is also showing promising signs of higher drilling activity,” Shearer said. “So we are looking to use two new terminals in that area.”

Emerge reported consolidated net income of $1.5 million (5 cents/share) in 1Q2018, versus  a year-ago net loss of $11.4 million (minus 38 cents). The company earned $5.6 million (18 cents) in 4Q2017.

Although volumes improved by 7% in the quarter, the sequential decrease in net income was primarily driven by several one-time charges, Diebert said. The company wrote off $3.9 million of deferred financing costs in conjunction with refinancing, and incurred $1.1 million of debt modification expenses. In addition, it wrote off $1.7 million of prepaid royalties and intangible assets related to its Jackson County, WI, mine site acquired in December 2015 as it does not intend to develop the property.

Capital expenditures (capex) in 1Q2018 totaled $30.1 million, with $29 million for growth and $1.1 million for maintenance. Most of the growth capex was directed toward the new San Antonio plant. Full-year capex remains set at $70-90 million.

Emerge’s outlook for the second quarter “is very positive,” Diebert said . “The new San Antonio plant will drive an estimated 10-15% growth in volume compared to the first quarter. Also, the railroad service continues to slowly improve, and the our newly expanded shipping outlets on the BNSF should increase our northern white volumes sold.

“We expect northern white sand prices to rise by a range of 3% to 5% sequentially, and the San Antonio volumes are accretive to our overall margins.” However, startup costs are adding up for the San Antonio plant related to labor, fuel, utilities and mining expenses, which could increase overall costs by 50 cents to $1.00/ton in 2Q2018.

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