The oil and gas fracking industry has delivered massive growth in oil and gas output over the last decade and a half. Starting in 2008 with about 1 mm BOPD from shale reservoirs, the industry has battled inefficiency, an adverse political environment, and low prices during that time to now produce in excess of 9.6 mm BOPD. For those who are interested, I discussed how technology had played a key role in this success in an OilPrice Special Report, The Future of Oil and Gas.
This growth hasn’t come without costs. From its earliest days, this process of fracturing oil and gas reservoirs has been astoundingly resource-consumptive, in terms of materials used to prop open the fractures in the rock. Each well requires millions of pounds of sand and like quantities of water to carry it into place. Negative public perception of the industry, combined with shifting governmental views about the advisability of oil and gas production, has made it incumbent upon the service and operating companies to put their best foot forward and minimize their environmental footprint. Particularly in the Permian Basin, concerns have been on the increase regarding the air quality impact from the truck trips needed to haul sand to the well site, as well as public safety on the roads. These concerns have caused Permian-based sand supplier, Atlas Energy Inc, (NYSE:AESI) to come to the market with a novel solution for the logistics around sand delivery.
Atlas’ Dune Express
Atlas is in the process of building a conveyor belt for sand delivery into the Delaware sub-basin of the Permian basin, with an expected completion date in Q-4, 2024. Aptly named, the Dune Express, (link to a short video on the Dune Express) this feat of technology and engineering will take tens of thousands of truckloads off the roads, reducing diesel consumption and enhancing public safety in the process.
The Dune Express will transport sand from the company’s newly constructed mine and warehouse in Kermit, Texas, deep into the Delaware basin to Drop Depots where Atlas’ triple-trailer last-mile logistics solutions will kick in. Using private lease roads, these off-road trailers can deliver triple the volume of single truck-trailer combination, taking the equivalent of two extra trucks off the road.
In an interview for this article, Kyle Turlington, Atlas VP of Investor Relations, noted that “about half the traffic on roads is related to sand delivery for fracking, creating congestion on the roads and public safety concerns. That, combined with the reduction in emissions from the diesel burned, can help to reduce the industry’s environmental impact, and improve the quality of life for people living in the area.”
Estimates vary, but it is very likely the Permian basin has another 15-20 years of high oil and gas productivity. Perhaps more, estimating of this kind is a soft science that depends on a number of variables. Oil and gas analyst firm Enervus notes in a summary of the Permian that, “the stacked pay zones of the Permian promise steady output for decades to come.” These stacked pay zones require stimulation, commonly referred to as Frac’ing, in order to produce their bounty. Here is the process at a high level.
The hydrocarbons are extracted from tightly compacted shale through the fracking process that creates deep fissures in the rock that are held open with the proppant sand. This increase in permeability enables the hydrocarbons to flow into the well. The industry has recently taken several steps that will favorably impact the market for sand. First, the lateral sections are being lengthened to 10-12, and even 15-thousand feet, driving a need for a 50% increase in sand per well by itself. Second, the completion intensity is increasing. This means more sand and water per foot of interval. A 15K foot well at 2,500 ppf treatment rate will require nearly 40 mm pounds of sand. (The figures in the lower left-hand quadrant of the Atlas slide below are representative of using 2,000 ppf on a 10K foot well.)
About Atlas Energy
Atlas is a pure-play Permian provider of sand and logistics to oil and gas operators. The company, founded by, former oil and gas operator Ben “Bud” Brigham, brings a track record of innovation to the market. In a few years, Atlas has become the leading sand supplier in Permian, with a delivery capacity of 15 million tons per annum-MPTA, as the next slide shows.
Atlas has a massive low-cost sand source in the Monahans sand hills, where the shallow Pecos aquifer enables the ability to dredge sand as opposed to using the typical “Yellow-Iron” (Slang for Caterpillar, Inc, (NYSE:CAT mining equipment.) methods employed by other sand suppliers. This, along with the step-change innovation of the Dune Express for sand transport, its triple-trailer last-mile logistics solutions, and its automated warehouse design, put Atlas at the top of the heap in this service category. Kyle Turlington summarized the Atlas advantage in our discussion thusly-
“We are the only company using dredge mining primarily for sand supply. This gives us a definite opex cost advantage compared with ‘Yellow-Iron, cutting down on the extra personnel and diesel usage that comes with it. We have two more dredges coming that we think will enable 100% dredge mining for our sand supply.”
I think Atlas makes for a compelling long-term investment case with its 100-year+ supply of high-quality sand and its appealing technological and logistics innovations. Its EV/EBITDA multiple currents sit at about 5.5X due to a decline in drilling and completion activity in the Permian. It has little debt and presents no risk of insolvency in the near future. Analysts are bullish on the company rating as a buy with price targets as high as $25.00. The Q-4, 2023 EPS forecast consensus is $0.50 per share, down from $0.57 in Q-3. Estimates begin climbing for Q-1, 2024 to $.56 per share and reach $0.71 by Q-3, 2024.
Given industry conditions now, investors with a modest amount of risk tolerance may wish to monitor the company for an entry point at or near current levels. On a technical basis, the company closed Friday at its resistance line of $17.44. It appears poised to move higher when trading opens on Monday, the 29th, perhaps denoting a shift in investor sentiment that will propel the stock higher in spite of the expected decline in EPS for Q-4. Subject to optimal entry points at each investor’s discretion, we think Atlas is the company to own for exposure to the sand component of Permian basin frac logistics.
By David Messler for Oilprice.com
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