Perhaps one of our biggest takeaways from the conference concerned two cost centers: water management and proppant, the crush-resistant silica sand that props open the cracks in the reservoir rock created by hydraulic fracturing.
Although upstream operators have found that loading more proppant into their fracturing fluid results in superior productivity, the trends toward longer laterals and tighter spacing between fracturing stages also increase the water and hydraulic fracturing sand consumed per each square foot of lateral well.
Although the quarter-over-quarter rate of change has slowed from mid-2014 to mid-2015, upstream management teams continue to highlight a preference for using larger proppant loads on a greater proportion of their completions.
Many companies also continue to test the effectiveness of even larger proppant concentrations in improving well productivity. Both trends suggest that the average amount of silica sand deployed per square foot will increase.
These forces remained in play last year, but the decline in overall completions—many upstream operators opted to build their inventories of unfractured wells while oil prices remained depressed—translated into an 18 percent drop in proppant consumption, to 36 million tons.
Oil prices above $50 per barrel prompted oil and gas producers to hedge planned output and accelerate their completion activity, tightening the market for silica sand and enabling miners to push through incremental price increases. The bull case for the proppant industry calls for further price inflation in 2017 as the bump in demand prompts sand producers to resume operations at mines on the higher end of the cost curve.
The eye-popping returns produced by shares of leading proppant producers—Emerge Energy Services LP (NYSE: EMES), Fairmont-Santrol Holdings (NYSE: FMSA), Hi-Crush Partners LP (NYSE: HCLP) and US Silica (NYSE: SLCA)—reflect these recovery prospects.
Momentum-seeking investors had piled into these names—one of the few growth stories in the beaten-down oil-field service space—bidding them up to valuations that required even the most bullish projections for sand demand and pricing to pan out. Disappointing guidance from some industry players and recent weakness in oil prices have provided the fast money with plenty of excuses to take profits.
Hi-Crush Partners recently acquired sand reserves in the heart of the Permian Basin, suggesting that the industry may seek to develop mining operations closer to the action (instead of Wisconsin and other Midwestern states) to reduce transportation costs and compete for share in the most active market.
This strategic move, coupled with industry plans to resume operations at idled facilities and the recent initial public offering of Smart Sand (NYSE: SND), underscores the industry’s limited moat and the importance of monitoring the supply side of the equation.
At the DUG Permian Basin Conference, we met with Black Mountain, a privately held
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