OPEC’s attempts to undermine US shale and regain lost market share hit hard, but not definitively. Now US shale producers have regrouped, and there is a second revolution in the making—this time it’s about efficiency and at its core is frac sand—the more, the better.
Welcome to the era of the ‘mega-frac’, as US producers create more fractures in rock to get more oil and gas out. And the ‘mega-frac’ requires mega sand to keep the fractures open, creating a bonanza situation particularly for unique micro-cap sand miners like Select Sands Corp. (TSXV-V: SNS).
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.
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.
Now, even with a rig count that is only half what it was at the height of the shale boom, Credit Suisse analysts predict that by just 2018, sand volumes used in fracking will surpass the boom levels of 2014. This will make frac sand the “fastest-growing sub-segment” in the oilfield services and equipment market.
Credit Suisse isn’t alone in this prognosis: 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.
It’s been great for frac sand stocks, with US 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.
Here are 10 (plus one) reasons why you should keep an eye on Select Sands Corp. (TSXV-V:SNS) which owns a substantial permitted quarry in Arkansas containing a desirable mix of Premium Tier 1 “Ottawa White” high purity 40/70 and 100 mesh silica.
#1 This is “Proppant-Geddon”
Shale boomers’ efforts to stay afloat amid the worst of the price crisis were centered on cost-cutting and efficiency improvements. A lot of companies managed to significantly improve their yields of oil and gas per well simply because they started using more and more sand. 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 US shale drillers are ramping up their sand use exponentially. EOG Resources (NYSE: EOG) is now making 700% 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”.
#2 Welcome to the “Mega-Frac”
Hailed as the response of the shale boomers to the OPEC strategy, the mega-frac approach comes down to using more water and liquids, and then sand, to increase substantially the number of fractures in the oil-bearing rock. Sand, together with impressive improvements in well design and injection technology, is what guarantees the higher yield per well in mega-fracs.
#3 Skyrocketing Demand
Greater efficiency means cheaper wells and cheaper wells mean more wells, all of which need to be filled with millions of pounds of sand. Tudor Pickering said in a recent report that the average amount of sand used per well will shoot up from 8 million pounds (4000 tons) to 11 million pounds (6,500 tons) next year. In some places such as the Permian, where drilling and production have been recently expanding due to the low production costs, Tudor Pickering projects an increase to as much as 35 million pounds (17,500 tons) of sand per well by the end of 2017. Credit Suisse predicts a 50% 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.
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.
#4 Strongest Margin Expansion in Oilfield Services Sector
Select Sands (TSXV:V.SNS) 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.
#5 Not all Sand is Equal
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.
#6 Cost-Effective Geography and Logistics
The surge in frac sand demand could soon lead to some logistics bottlenecks.
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: it’s just 3.1 miles from a highway and 15 miles from a railway.
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.
#7 Lucrative Game of Catch-Up in the Permian
Right now, the Permian Basin is playing a quick game of catch-up with other basins in terms of how much sand they are using for mega-fracs. This means that all eyes are on sand demand in this basin, and whoever is closest can get it there cheaper.
#8 Additional Upside—So Many Uses for Sand
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 from the glassworks, ceramics, chemicals, and metal-forging industries and appears to be on the verge of obtaining substantial orders. 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.
#9 Pure-Play Power
Pure-play sand-mining is a winner at a time when demand for frac sand is soaring and set to explode in a very short time. In demonstration of its focus on its main operation, Select Sands recently announced its divestment of its gold mining projects in Canada to Comstock Metals in return for 20 million shares in Comstock Metals (symbol: CSL.V traded on the Toronto Stock Exchange, Venture Exchange) which represents nearly a 35% ownership in Comstock Metals.
Select Sands recently announced that it bought a wet processing facility near Sandtown. This acquisition 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.
#10 The Only Micro-Cap Positioned to Take Advantage of the Sand Boom
There are just a handful of public frac sand producers in the U.S. and most of them are big--and expensive. Select Sands is a great example of a penny stock worth investors’ attention, with a market cap of $27.82 million at present. The company has made high-quality silica sand mining its exclusive focus and is committed to further growing its production and processing assets in northeastern Arkansas. Investors also receive a virtually free option in Comstock Metal’s growth.
#11 50% Share Price Jump
With a choice of sand-dependent industries as existing and prospective clients, and with the bullish prospects for the second shale revolution Select Sands is among the best-placed companies in its segment, last month adding 50% to its share price thanks to the favorable trends. That’s a segment, by the way, that has seen a notable pick-up in M&A activity reflecting the sand demand growth.
U.S. Silica, for example, recently bought a Texas sand mine plus a frac sand logistics company. Select Sands is an excellent opportunity as a standalone business and, equally, a tasty morsel for bigger players. Given the supply/demand trends, the company’s stock won’t stay cheap for too long particularly as it is still a hidden gem.
At this point, the market strongly believes that we’re done with price concessions from sand suppliers particularly those suppliers owning a substantial high-quality, high-purity, finer grade silica quarry in a geographically advantageous location. According to analyst forecasts, frac sand use is set for strong and continued growth even if – and that’s the best part – crude oil remains within the $40-$50 range.
In other words, this revolution is not contingent on an oil price rally, and that makes a perfectly positioned small-cap a perfectly attractive play.
By James Burgess of Oilprice.com
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