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Pioneer Locks Up Frack Sand Supply

Dallas-based Pioneer Natural Resources Co. has agreed with a subsidiary of Carmeuse Holding S.A. (Luxembourg) to acquire its U.S. industrial sands business, Carmeuse Industrial Sands (CIS), for $297 million, giving it a large supply of sand for hydraulic fracturing (fracking) activities.

Pioneer said CIS is the No. 1 producer of Hickory frack sand (Brady Brown brand) used as proppant for fracking oil and gas wells in the United States. "Hickory sand is considered to be the highest quality brown sand for fracture stimulation," Pioneer said.

The CIS mine in Brady, TX, has more than 30 years of proven brown sand reserve life, Pioneer said. The Brady mine has sales capacity of one million tons per year.

"When Carmeuse recently announced plans to sell its U.S. sand business, we viewed this as a strategic opportunity to secure high-quality, low-cost and logistically advantaged brown sand supply to support our growing fracture stimulation requirements in three of our four core Texas growth assets: the Spraberry vertical, horizontal Wolfcamp Shale and Barnett Shale Combo plays," said Pioneer CEO Scott Sheffield.

"The acquisition complements Pioneer's vertical integration strategy, which is reducing execution risk and controlling costs. By securing supply at below-market prices, we expect to reduce annual capital spending by $65-70 million based on our estimated sand requirements and current market prices."

As demand and cost for proppant sand have increased, some producers, like Pioneer and also EOG Resources Inc. (see Shale Daily, May 11, 2011) have found it more economical to acquire their own sand resources rather than purchasing supply from other parties.

The sand produced from the Brady mine is generally of the coarser variety, best suited for oilier plays in tighter rock, COO Timothy Dove said during a conference call to discuss the transaction Monday. CIS has been Pioneer's biggest supplier for its Permian Basin operations and the producer has been the company's largest customer. "It's going to be a critical asset in terms of our stimulation requirements..." Dove said. "I think the transaction is going to suffice for quite a long time for our sand needs..."

Pioneer's annual demand for proppant to support fracking operations is forecasted to increase from 1.2 million tons in 2012 to 1.6 million tons in 2015 as drilling activity continues to ramp up in the Spraberry vertical, horizontal Wolfcamp Shale, Eagle Ford Shale and Barnett Shale Combo plays, the company said. Seventy percent to eighty percent of Pioneer's forecasted proppant demand is for brown sand for the Spraberry vertical, horizontal Wolfcamp Shale and Barnett Shale Combo plays. Its primary source for brown sand is the Brady mine. Prior to the acquisition, Pioneer expected about 700 thousand tons, or 60%, of its forecasted 2013 brown sand requirements to be sourced from Brady.

The supply of brown sand is expected to continue to be tight as a result of increasing shale play drilling, with the price of brown sand expected to escalate further as the growth in demand for this proppant outpaces new supplies, Pioneer said. Other brown sand mines are primarily supplying large service companies. "White and resin-coated sand alternatives are more than two times and seven times the cost of Brady sand (inclusive of transportation), respectively, and are not necessary for most Spraberry vertical, horizontal Wolfcamp Shale and Barnett Shale Combo fracture stimulations," the company said.

Assuming Pioneer could replace its current brown sand supply at market prices and would have to substitute its incremental brown sand requirements (300 thousand tons in 2013) with white sand due to lack of brown sand availability, Pioneer estimates that it will save $65 million to $70 million per year by acquiring CIS. After taking into account an additional $10 million of annual cash flow from CIS' other assets, Pioneer's total annual savings are estimated to be $75-80 million.

Pioneer said output from the Brady mine can be doubled from one million tons per year to two million, which would support any future increases in Spraberry vertical, horizontal Wolfcamp Shale and Barnett Shale Combo drilling activity above the its current drilling growth plans. CIS also has 23 million tons of white sand reserves in Wisconsin, where plans to develop a mine with a production capacity of up to one million tons per year are moving forward.

Hauling sand from the Brady mine in south-central Texas is economically accomplished by truck. The economics that Pioneer currently enjoys for moving sand likely could not be beat by a rail solution, Dove said.

By locking in sand supply, Pioneer is avoiding having to resort to the spot market for sand procurement in the future -- at higher prices, Dove said. The acquisition of CIS is part of ongoing vertical integration at Pioneer.

The producer has acquired "a lot of different ancillary pieces of equipment...to protect ourselves from cost creep," Dove said. Another significant area of supply needs is water for fracking. Pioneer has been drilling its own water wells and has "quite a few pilots in place" to clean produced water for reuse. "We have many different activities focused on providing our own water needs," Dove said.

CIS management has agreed to join Pioneer. The acquisition would be funded from available cash and is expected to close late in the first quarter or early in the second quarter.

CIS' other assets, which make up a relatively small portion of the industrial sands business, include two outlets (Bakersfield, CA, and Colorado Springs, CO), producing sands like those from Brady; two sand mines in Ohio (Glass Rock and Millwood), which produce oilfield and industrial sands; one sand mine in California (Orange County), which produces construction and recreational sand; and an oilfield cement material processing plant in Riverside, CA.

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