Permian ‘Silica Valley’ not likely to see consolidation for some time – conference insight

Provided exclusively by Mergermarket, an Acuris Company

  • Sand mine boom could lead to oversupply
  • Buyers could include upstream, oilfield services and coal companies
  • Public capital markets could help fund consolidation

A construction boom in Permian Basin frac sand mines could result in oversupply and disrupt the larger industry, but corporate consolidation is not imminent, said speakers at the 6th Annual Frac Sand Supply & Logistics Conference in Houston on 28-29 September.

In the Permian Basin of West Texas and eastern New Mexico, there are at least 19 frac sand mines in operation, under construction or in development with a nameplate capacity of 70 million tons per annum (MTPA), said Joseph Triepke, founder of Infill Thinking, an oil and gas analysis firm, during a panel.

The Permian is experiencing a “sand land rush,” said Dave Frattaroli, EVP of Business Development, High Roller Sand. Christopher Haymons, an investment banker with Industria Partners, referred to the sand mine boom as “Silica Valley.”

Meanwhile, Credit Suisse analyst Jake Lundberg put it more bluntly during his presentation, “Everybody and their grandmother have announced three-million-ton-per-year Permian Basin sand mines.”

Fear of oversupply has driven down the stocks of publicly traded sand companies, said Lundberg. U.S. Silica Holdings [NYSE: SLCA], Hi-Crush Partners [NYSE: HCLP], Fairmount Santrol Holdings [NYSE: FMSA], and Emerge Energy Services [NYSE: EMES] have seen their stock prices decline almost 70% in 2017, he said.

Almost 50% of all US land-based drilling rigs are active in the Permian Basin in West Texas and East New Mexico, he said.

Seeking to control costs, upstream producers have sought ways to replace the premium-grade Northern White Sand (NWS), speakers said. Those efforts have included using sand with a lower crush strength, 7,000 psi versus 10,000 psi for NWS; smaller grain size, 100 mesh versus 40/70 for NWS; and closer proximity, Texas versus Wisconsin. Those dynamics have driven developers to focus on the Kermit sands in West Texas, speakers said.

Despite plans for 70 MMTPA of total frac sand capacity, only 25 MMTPA to 35 MMTPA would ultimately come to market, Haymons said, speaking on the sidelines.

Overall proppant demand, which is dominated by frac sand, is expected to reach 121 million tons in 2018, said George O’Leary, analyst, Tudor Pickering Holt. The Permian represents 45% of that demand, split evenly between the Midland and Delaware sub-basins.

Deals on the horizon 
Speaking during a panel, Frattaroli said he didn’t see “merger mania yet.” InFill’s Triepke agreed and thought corporate consolidation, if it were to happen, would wait until later in 2018.

The bid-ask spread is just “too wide,” said Laura Fulton, CFO, Hi-Crush Partners, speaking during the same panel. The opportunity right now is to build, she added.

This news service has previously reported that Emerge, Hi-Crush Partners, Fairmount Santrol, Unimin, US Silica, and Smart Sand[NASDAQ:SND], are likely to be buyers.

Companies from adjacent industries could move into the frac sand space, such as coal companies, said Haymons, speaking on the sidelines.

High Roller’s Frattaroli saw both upstream and oilfield services companies as potential buyers as frac sand becomes a larger portion of the overall cost of an onshore well. Schlumberger [NSYE: SLB] owns a sand mine in Wisconsin and plans to build one in the Permian, he noted.

Pioneer Natural Resources [NYSE:PXD] and EOG Resources [NYSE:EOG] are both upstream companies that own their own frac sand mines.

Frac sand previously represented around 10% of the cost of well but sharp increases in the amount of sand being used has raised that fraction to as much as 25% of a well, said InFill’s Triepke.

Rise of public sand companies
During a question-and-answer session, Black Mountain Sand CEO Rhett Bennett said a new group of frac sand companies, both publicly held and private equity backed, could have an impact on consolidation.

Black Mountain Sand itself is backed by Natural Gas Partners and has invested USD 500m in its sand mine projects, which includes 26,000 acres of sand resources, he said, speaking on the sidelines.

Black Mountain Sand is affiliated with a number of other Black Mountain companies, including an upstream production company, a mineral and royalty company, a midstream company, and an oilfield services company, according to previous reports by this news service. In the last year, all those Black Mountain affiliates have exited their positions except the mineral company, Fort Worth Minerals, and this news service reported it would be coming to market by year-end.

Black Mountain Sand will pursue a strategy different than its affiliates, Bennett said, but declined to provide further details.

Multiple frac sand-related companies are looking at public stock offerings and positioning themselves for a potential debut in 1Q18, said Ryan Maierson, partner, Latham & Watkins. He noted that there have been more oilfield services IPOs in the last year than in the last ten years combined.

Frac sand companies are less likely to pursue a master limited partnership structure, said Maierson, as high-growth companies have other needs for capital than paying distributions to investors.

Meanwhile, Hi-Crush’s Fulton said her company was able to pursue an MLP because of term and structure of its contracts.

Solaris Oilfield Infrastructure [NSYE: SOI] CEO Greg Lanham agreed on the importance of properly structured contracts and noted that currently its contracts wouldn’t fit an MLP but that could change in the future.

Other-than-Permian plays
Although the Permian is receiving the bulk of attention, proppant demand outside the Permian is 55% of the market and may be an underserved opportunity, said Tudor Pickering’s O’Leary.

The Eagle Ford will represent more than 12% of the market and the Marcellus more than 11%, according to figures presented by O’Leary. Meanwhile, the Williston, Niobrara, Haynesville, and SCOOP/STACK each represent more than 6% of the demand.

Although no other basin offers the same scale of opportunity as the Permian, said Frattaroli speaking on the sidelines, East Texas sand mines to serve the Haynesville could be of interest because the company is headquartered in that area. On 20 September, Frattaroli told this news service High Roller could look at other buys once its Permian sand mine becomes operational.

by Mark Druskoff in Houston

Write to: mark.druskoff@acuris.com

As seen in the Mergermarket, an Acuris company, newsletter on 04/10/2017

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