Fracking Industry Digs Texas Sand -- Market Talk

[wilmawatts]

Fracking Industry Digs Texas Sand -- Market Talk
BY Dow Jones & Company, Inc.
— 8:23 AM ET 07/20/2017
8:23 ET - Credit Suisse notes a bifurcation in the world of frac sand as the oil industry in Texas suddenly starts using locally-mined sand for fracking rather than hauling it expensively by train from mines in Wisconsin. The firm downgrades to neutral from outperform a pair of companies levered to Wisconsin's once-revered Northern White sand -- Fairmount Santrol ( FMSA and Smart Sand ( SND ) -- but keeps its outperform rating on US Silica SLCA and Hi-Crush Partners ( HCLP
) , which have added mines in west Texas's Permian Basin. "Frankly, we are surprised at how much Texas capacity can be used as proppant [sand], and is being developed." (dan.molinski@wsj.com)

[k1f]

In the May 29th issue of the New Yorker, David Owen surveys the world's sand as a geological phenomenon and an increasingly scarce commodity. Who'd have thought that sand is part of the ecological equations that hold the world together:

http://www.newyorker.com/magazine/2017/ ... ut-of-sand

[dan_s]

Hi-Crush is the low cost producer of Northern White and they have the best distribution network. Hi-Crush also is the #1 provider of sand to the Marcellus/Utica where they use a lot of sand to complete extended reach horizontal wells.
The impact of the new Texas sand mines will not be a big deal until late 2018 IMO.

[par_putt]

While playing Golf this morning , I saw a very long train carrying at least 100 cars full of sand. Within 10 min there was a second train that looked longer it was fully loaded with coal traveling in the opposite direction. This was in Frisco Texas. The Economy is moving on.

[dan_s]

Attached to my podcast email today was a report on frac sand from Credit Suisse. You should all read it. Credit Suisse 2017 forecast for HCLP is much higher than mine and their 2018 forecast is almost identical to mine. They do have a more pessimistic outlook for 2019. IMO it is a bit too early to estimate what 2019 will look like.

[cmm3rd]

CS, while maintaining an outperform rating for HCLP, cut its price target rather dramatically from $24 to $12. That helps explain recent weakness.

Clearly, reinstatement of a distribution would help valuation.

Dan, or anyone, do you have any insight as to the company's thinking re when they will be in a position to resume making a distribution?

[k1f]

With HCLP and FMSA both down nearly 10% while Select Sands remains unfazed, you'd think that this sell-off is targeted, and one way or another connected to the recent brokerage downgrades. Somebody's getting a startling low entry price.

Henry Hub natgas futures also mugged today.

[dan_s]

I have updated my forecast model for Hi-Crush and posted it to the EPG website.

Take a look at row 48 "Cash Flow per Unit" and you will see that HCLP's cash flow from operations is expected to grow rapidly over all forecast periods. Compare my CF per unit to First Call's estimates which are in the RED BOX.

I talked to Laura at the beginning of this year and she said their "hope" was to start making distributions again by the end of 2017. A lot will depend on the outlook at year-end, but based on my forecast, HCLP should be generating lots of DCF by then.

Note that in 2015 HCLP made distributions of $1.15/unit when operating cash flow was $2.003/unit. My forecast of cash flow per unit for 2018 of $2.138 compares to First Call's estimate of $2.58.

Also, keep in mind that the Credit Suisse report is focused on the Texas market. Hi-Crush provides sand to all of the major producing regions and they are #1 in Marcellus/Utica.

We should have a better idea where the sand market stands after next week when all of the sand companies announce Q2 results and operations updates.

[drlink]

Sand Players getting hit hard today on HAL comments suggesting Sand use getting "smarter" use now going down per well? HAL predicting sand prices should drop.

[k1f]

Well, at 3:30 EST, HCLP and FMSA are down nearly 14% and 17%. New ytd lows for both companies. This sort of panic is very strange. HAL has warned that frac sand will be cheap going forward. You might wonder if this is self-serving "fake news" considering that in March, Halliburton was reported to be "struggling" for profit this year, in part because sand is expensive and they hadn't stocked up:

<<Halliburton also is hurt by supply-chain price increases, such as the rising cost of sand for fracking, while the company’s own services pricing hasn’t risen to match its growing costs. Because Halliburton doesn’t have enough sand supplies under contract, Lesar said, Halliburton is taking a $50 million hit just on inflated sand prices. Internationally and offshore, the industry continues to struggle and won’t begin to bounce back until late 2017 or beyond, he added.>>

http://www.mysanantonio.com/business/ea ... 026358.php

[par_putt]

3:00 PM ET 7/21/17 | Morningstar
We are lowering our fair value estimates for all proppant companies under our coverage. U.S. Silica moves from $32 per share to $24.50, Fairmount Santrol from $3.75 to $2.25, Smart Sand from $13 to $8, and Hi-Crush from $15.50 to $11. At current share prices, this means we now view U.S. Silica and Fairmount as overvalued, and Hi-Crush and Smart Sand as close to fairly valued, although still trading at below our fair value estimates. Additionally, we have widened our uncertainty ratings for Hi-Crush, Smart Sand, and Fairmount.
The reason for this change is our new forecast of lower midcycle Northern White mine-gate frac sand pricing, which we estimate at $29 per ton, vs. our prior estimate of $33 per ton. The $29 per ton value is only marginally above trough 2016 levels of perhaps $24 to $26 per ton and stands much below peak pricing of about $55 per ton in 2014.

This lower forecast comes from our re-assessment of the volume of new low-cost regional supply coming online over the near term. We have identified several new permitted mines in the Monahans Sandhills region of West Texas. While there is little information about the potential capacity or feasibility of these prospective mines, we are assuming that these mines will bring on 9 million tons of new supply, or about 10% of our forecast 2020 supply. Given that these prospective mines are in the vicinity of more proven new developments, such as Hi-Crush's Permian Basin mine that has already lined up customers, we think there is a reasonable probability that each mine is successful.

With 9 million tons of new low-cost supply, our estimate of required 2020 (midcycle) Northern White supply falls from 51 million tons to 42 million tons. This in turn, means that marginal supply comes from a lower-cost Northern White mine, which consequently lowers our forecast Northern White mine-gate pricing.

[dan_s]

It will be interesting to hear how the sand companies respond to this on their conference calls.

It will also be interesting to see how the investors and bankers that have money in new sand mines respond. My guess is that some may be de-funded.

I updated my forecast for Hi-Crush today and I noticed that First Call's forecasts for revenues, EPS and CFPS were all higher than they were at the beginning of July. My forecasts for both 2017 and 2018 are very close to what Credit Suisse now expects from Hi-Crush. Keep in mind that the over-supply issue is primarily in Texas. Hi-Crush supplies frac sand to all of the major basins, including the Marcellus/Utica where they sell a lot of sand. Plus, Hi-Crush will have their own Texas mine open in a few months.