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Hi-Crush Selling 'Every Grain of Sand' Produced

Hi-Crush Partners LP, which produces and markets Northern White sand used as proppant in hydraulic fracturing (fracking), may see demand rise this year even as rigs are dropped because production rates are more important than ever, a top executive said last week.

Speaking to analysts during a fourth quarter conference call, Co-CEO Jim Whipkey said frack sand demand could be flat from 2014 or potentially grow even as rigs are laid down as a result of the changes in completion methods.

"We continue to sell every grain of sand that we produce," Whipkey said. Selling sand so far has not been an issue.

"The focus remains on the same factors we've mentioned before: longer laterals, increased stages per well and ultimately more proppant per stage, which by now has been proved to maximize rates of return from a particular well," Whipkey said. "If you're a producer in today's environment, sure, you're cutting rigs. Of the rigs you keep, however, you're likely concentrating on the core areas of your plays.

"It's these core areas where we keep hearing about the biggest frack jobs, the record frack jobs and the better results from using more sands. As a producer today, you're likely going to do everything you can to maximize your cash flow, your returns and performance results in the areas where you are drilling and for the most part that means using more sands."

During the last industry downturn in 2009, the amount of sand used in drilling operations contracted, but it has since rebounded every year, and as technology has grown, sand has become an even more integral part of efficient drilling operations.

"We do believe the trend of more sand per well is here to stay,” Whipkey said. “Secondly, the return of the producers to their development-oriented core areas plays right into the goal of maximizing returns on invested capital, which again means more sand. Finally, still only a small percentage of operators are employing these techniques, a percentage we see increasing even in this downturn."

Using more sand isn't a "panacea for falling rig counts," and there's pressure for the oilfield service industry and suppliers.

"Moving forward, we believe that estimated and published industry capacity for certain sand producers is overstated and unrealistic...There are a lot of anecdotes out there about what's being built or what might be built over the next few years. We believe that most expansion is theoretically targeted for later in 2015 and 2016...Some of these new plants won't ever exit the planning phase, and those that do will see significant roadblocks due to permitting and financing challenges...We see this every year. A lot of these plants just don't get built."

More than 88% of Hi-Crush's 2015 production, or 6.6 million tons of sand, is committed under long-term take-or-pay contracts, usually four years or longer in length.

Revenues for 4Q2014 totaled $130.9 million on sales of 1.5 million tons of frack sand sold and transload services. About 90% of the volumes sold were under long-term fixed-price contracts.

Even with all of the contracts and few spot market deals, "all of our customers have requested price concessions," said Co-CEO Bob Rasmus. "We're not alone or unique in that regard. Every single supplier to the service companies, much less every sand company, has received a similar letter or request...We have strong relationships with our customers, and we're working closely with them to be part of the solution..."

Hi-Crush is "working with customers to reduce or eliminate inefficiencies with a goal of reducing the all-in cost of sand at the well site," Rasmus said. "And we think we're in a good position with our distribution and terminaling system network to help our customers reduce that all-in price and go a long way to meeting their target goals of reducing price."

Whipkey said "price is usually the first thing that's brought up. But I'll tell you, we've talked with our customers throughout 2014 about the money they were leaving on the table, paying railroads demurrage and car fees. Frankly, things were so good, they hadn't focused on it. But now, we're actually seeing customers say, 'yes, we now see what you were talking about. Let's sit down, roll up of our sleeves and rather than just focus on price, let's figure out ways to lower the landed cost in the basin,' which is really the bottom line. That's the renewed focus of our customers."

Rasmus said "scale and logistics" have become key to oilfield service operators, "where the average horizontal well uses more than 10 million pounds of sand, which equates to more than 50 railcars of sand to travel from our mine site in Wisconsin to the terminal in the shale basin and eventually to the well site…”

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