Canary in the Sand Mine?
US Silica (NYSE: SLCA) mines and supplies a key input in the hydraulic-fracturing process used to extract hydrocarbons from prolific US shale plays: the crush-resistant silica sand that props open the fissures in the reservoir rock, enabling the oil and gas to flow into the well.
The most robust price inflation in the oil-field service and equipment industry has occurred in the market for silica sand. Some of these price increases reflect tightness in the market for higher-quality sands, a headwind that should moderate as the industry ramps up production at idle mines and brings new capacity onstream.
These tailwinds enabled Hi-Crush Partners LP (NYSE: HCLP) to resume paying a distribution in the second quarter, while US Silica announced a share buyback plan after posting solid third-quarter results.
However, the impending boom in in-basin sand in the Permian Basin—where operators have announced plans to develop 80 million tons per annum of capacity—threatens to upend the industry and pressure margins. Given the timing of these projects, the first half of 2018 could be the peak for the proppant industry.
Against this backdrop, we applaud US Silica’s strategic decision to bulk up its industrial segment with the acquisition of privately held EP Minerals, a privately held producer of engineered materials derived from diatomaceous earth, calcium bentonite, perlite and other industrial minerals. This push to diversify its revenue mix suggests that management understands the fleeting nature of the current bull-market in silica sand.
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Elliott and Roger on Sep. 27, 2018
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