As Saudi Arabia cuts even more oil than promised, U.S. shale production is up by 176,000 barrels per day—but it’s the frac sand industry that will feel the real revolution, and micro-cap sand producers who have flown under the radar until now are about to come up for some very lucrative air.
But the U.S. shale rebound started even before the historical OPEC deal—so we’re already running out of time to get in on the frac sand euphoria.
Last week, the Saudis said they had cut production to below 10 million barrels per day, which is a two-month low, and lower than the Kingdom had pledged to cut. At the same time, the Energy Information Administration (EIA) came out with news of a 176,000-barrel-per-day increase in U.S. production from the previous week—the biggest increase since May 2015.
The shale rebound started when no one expected the OPEC deal to become a reality, and now that it is and the market is starting to rebalance, things are about to go much further. The EIA sees U.S. production for December coming in at 320,000 barrels per day more for the year, with production reaching 9.22 million barrels per day as of the end of 2016.
And even this is probably conservative.
But it’s not just about OPEC—it’s about the ‘Mega Frac’—the frac of all fracs that requires a ton of sand and is making it possible for U.S. shale operators to produce in any kind of market.
Hydraulic fracturing involves injecting highly pressurized water and sand into a well, widening the tiny fractures created by the water and sand blast so that more crude oozes from the shale rock. As U.S. producers create more fractures in rock to get ore oil and gas out, they need the ‘Mega Frac’, which requires mega sand to keep the fractures open.
Producers are now using more sand, or proppants, per well than anyone ever imagined, bringing the frac sand sub-sector to the forefront of oil and gas investing in a very urgent and dramatic way.
So the bottom-line situation is this: While frac sand companies are at the center of the U.S. shale rebound, unique micro-cap sand miners like Select Sands (TSX.V:SNS) (OTCQB:SLSDF) are poised for potentially astounding gains precisely because as early as mid last year, no one thought frac sand would be a winning bet and only a few months later, it’s the biggest thing on the U.S. oil and gas scene.
Here are 3 reasons to keep a close eye on Select Sands (TSX.V:SNS) (OTCQB:SLSDF) and its substantial permitted quarry in Arkansas containing a desirable mix of Premium Tier 1 “Ottawa White” high purity 40/70 and 100 mesh silica.
#1 Most Explosive Oil & Gas Sub-Sector
Tudor Pickering predicts the amount of sand used per horizontal well will jump from 8 million pounds (4,000 tons) today to a staggering 11 million pounds (6,500 tons) already next year, and will continue to break records in the following years.
Credit Suisse predicts a 50 percent increase on 2015 demand and is eyeing 62.8 million tons of frac sand demand in 2018. In 2017, we could be looking at 49.4 million tons.
By 2018, according to Credit Suisse analysts, sand volumes used in fracking will surpass the boom levels of 2014, making frac sand the “fastest-growing sub-segment” in the oilfield services and equipment market.
It’s been great for frac sand stocks, with U.S. Silica (NYSE:SLCA) jumping from $16 to $40 this year, but from an investment perspective, there aren’t many plays to choose from here. And there’s really only one micro-cap listed that is geographically positioned to benefit from this shale efficiency revolution: Select Sands Corp. (TSXV-V:SNS). Being a micro-cap, Select Sands is flying under the radar (at least for now) and has no analyst coverage.
#2 Preparing for ‘Mega Demand’
Not only have frac sand stocks had a great few months, but the fundamentals behind that surge are clear and present. Smart Sand held its IPO in early November in what Reuters called “another sign of industry confidence”.
Companies such as U.S. Silica, Emerge Energy Services LP and Hi Crush Partners LP all had saw an increase in business as far back as the third quarter of last year—before the OPEC deal was even close to being a reality. Texas-based Rangeland Energy LLC says it’s looking to expand its frac sand transport and storage capabilities because volume is soaring enough to double up. Hi Crush is expecting double-digit volume increases in the fourth quarter. And this is all just a snippet of the bigger picture as we get into 2017.
And demand is poised for an amazing upward spiral because frac sand is the backbone of shale companies’ efforts to cut costs and improve efficiency by increasing their yields of oil and gas per well.
The more sand used in a well, after the pressurized liquid and sand is injected in the rock, the larger the fractures in the rock oozing precious oil and gas. Thanks to sand, you get a lot more oil and gas out of a well at no great additional cost.
All the major U.S. shale drillers are ramping up their sand use exponentially. EOG Resources (NYSE: EOG) is now making 700 percent more fractures compared to 2010, and it’s using massive volumes of sand to fill them. Likewise, Chesapeake (NYSE:CHK) put more than 30 million pounds (15,000 tons) of sand into its Haynesville shale in Louisiana, and plans to test a 50-million-pound load (25,000 tons) later this year. The company views the amount of sand now being used as unprecedented to the point that it refers to it as “proppant-geddon”.
The Permian Basin is the one of the sweetest spots here because operators just can’t get enough sand as drillers narrow in on this West Texas gem with an acquisition fervor we haven’t seen since the start of the shale boom. Here, proppant demand is expected to increase significantly as the Permian catches up with other basins in terms of frac sand use.
The bottom line? Demand for sand in 2017, particularly the finer grade (40/70 and 100 mesh) high purity sand contained in Select Sands’ Arkansas quarry, could end up being twice the demand of 2014—at the height of the shale boom. There may even be a shortage of finer grade frac sand by the first quarter of 2017.
#3 Purest Sand for Strongest Margin Expansion
Select Sands (TSX.V:SNS) (OTCQB:SLSDF) is right in the middle of what Tudor Pickering views as the oilfield services sector with the strongest margin expansion—and this expansion is far from over. Tudor Pickering says finer mesh white sand pricing at the minegate should reach $65 per ton, compared to the current $20 per ton.
Select Sands mines high-quality Northern White finer grade sand from the Sandtown deposit in Arkansas, with indicated resources of 41.98 million tons as of February this year. The sand is high-purity, meaning it contains a high purity silica content (exceeding or meeting various industrial and API Tier 1 specifications) with the right shape and it has high crush resistance. The right shape for good frac sand is as close to round as possible, which enables more efficient infiltration of rock fractures to keep it open and keep the oil flowing.
Margins are also increased here because Select Sands’ Sandtown quarry is located in northeastern Arkansas, in close proximity to the Permian and the Eagle Ford plays in Texas, Haynesville shale in Louisiana and Fayetteville shale in Arkansas. This means there is a lot to be saved on transportation costs, compared with the other main source of high-quality (but expensive) frac sand located in Wisconsin. The Select Sands’ quarry also has the added advantage of a developed transport infrastructure with easy accessibility to both highway and railway that could be used to further improve costs.
And the shift is about more than transportation: It’s about the industry’s cost-cutting desires to replace the more expensive sand mined in Wisconsin and Minnesota with regional sands of Texas and Arkansas.
Select Sands recently announced that it bought a wet processing facility that will further reduce costs of production and make its sand all the more appealing for the frugal oil and gas industry. The Company plans on buying a dry plant and other facilities as well in the area and is currently considering its options.
There’s even more upside:
High-purity finer grade silica sand is not just used for fracking. It’s indispensable in ceramics, metal-making, chemical products, glass, paints, and surfacing materials. In other words, Select Sands, which mined its first silica sand at Sandtown last year, is successfully providing test samples of its high mesh silica to a host of industrial companies, and has recently started shipping product to the oil and gas market. Selling high-purity finer mesh white sand to the industrial market has the advantage of higher margins, although typically smaller volumes, than sales to the oil and gas frac sand market.
At the end of the day, these frac sand producers tend to fly under the radar while everyone pays attention to the most visible players in the U.S. shale revival. That give companies like Select Sands a major advantage at a time when pure-play sand mining is a clear winner and frac sand mining is set to explode dramatically and suddenly.
Of the handful of public frac sand producers out there, most are too big to get in on the ground floor—and too expensive. Select Sands, with a $88MM U.S. market cap, is accessible, cheap, and the timing is brilliant.
By Joao Peixe of Oilprice.com
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