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The View from the Oil-Field Services Industry

By Elliott H. Gue on Apr. 30, 2018

Among the diversified oil-field service companies, Halliburton (NYSE: HAL) boasts the most leverage to the North American market and has built leading positions in many of the key service categories needed to exploit US shale plays.

For this reason, the market pays close attention to CEO Jeff Miller and his team’s comments about the US pressure-pumping market—the horsepower that propels the fracturing fluid into the reservoir rock—and other business lines.

In the first quarter, Halliburton and other services companies faced bottlenecks for silica sand, which is used to prop open the fractures in the reservoir rock. In particular, frigid weather delayed rail shipments of northern white sand from mines in the Upper Midwest to the red-hot Permian Basin in West Texas and New Mexico.

To offset these disruptions, Halliburton bought sand on the spot market at a much higher cost and transported some cargos by truck, resulting in a $0.10 hit to the company’s earnings per share.

Management asserted that growing adoption of sand mined in the Permian Basin should help to alleviate this bottleneck and reduce transportation costs in coming quarters. As to how quickly this transition will occur, Halliburton’s CEO indicated that a profusion of new mines creates a “path to oversupply that market from the Permian.” Management indicated that a similar story has started to unfold in the Eagle Ford Shale and other basins, potentially providing producers with some cost relief in an otherwise inflationary environment.

This news presents a stiff headwind for formerly high-flying sand producers, such as Hi-Crush Partners LP (NYSE: HCLP), Emerge Energy Services LP (NYSE: EMES) and US Silica (NYSE: SLCA). The latter boasts the strongest balance sheet of the bunch and recently opted to diversify into industrial materials rather than consolidate the proppant industry. Investors should continue to stand aside on these names; those who still own these stocks should sell.

 

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