A Backdoor Way To Profit From The Fracking Boom

Spurred by heavy drilling in the Permian Basin, demand for oil and gas fracking sand continues to explode. Between 2012 and 2014, annual consumption rose to 60 million tons from 34 million. Usage then trailed off for a couple years when crude prices crashed and drilling activity subsequently dried up.

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But the on-again, off-again rally is back on.

#-ad_banner-#With benchmark WTI prices rebounding back to $70 per barrel, producers have stepped on the gas. And frac sand consumption has followed suit, setting a record high last year. If the latest reports are any indication, 2018 will bring even further growth.

According to Bloomberg, 23 new frac sand mines are currently under development, just in West Texas — to say nothing of other fertile basins across the country such as the Marcellus Shale, The Utica Shale, and the Niobrara shale.

With producers like Concho Resources (NYSE: CXO) and Occidental Petroleum (NYSE: OXY) filing permits to drill nearly 20,000 new wells nationwide this year, forecasters believe frac sand usage will top 110 million tons.

My View
The magic ingredient in the fracking process is proppant (usually a mixture of sand and fluids), which is injected down the well at high pressure to artificially crack rock and leave it propped open for trapped oil and gas to escape to the surface.

This requires a lot of sand. Depending on location, the average well now uses about 1,000 pounds of proppants per foot, or 8 million pounds for an 8,000-foot horizontal well. That’s about 4,000 tons.

For context, it can take more than 500 truckloads or 75 railroad cars to haul in enough sand for a single new horizontal well. Through years of trial and error, producers have discovered that more sand produces better results. So proppant intensity (measured in pounds per lateral foot) has risen by 60% over the past three years.

Studies indicate that per-well returns in some reservoirs won’t be maximized until proppant loadings reach 3,000 pounds per foot. That’s one reason why the global frac sand market is projected to grow at a 14.7% pace over the next five years.

We have touched on some of this already but haven’t yet discussed it in dollar terms. At the current growth rate, annual revenues will more than double from $2.9 billion in 2017 to $6.7 billion by 2023.

Again, the Permian Basin is driving most of this growth. Until recently, the preferred proppant has been a high-quality white sand from Wisconsin and Minnesota. This particular sand is prized for its shape and strength, which can keep wells producing for longer. But transporting it to Texas isn’t cheap, with rail freight averaging $60 per ton, just for the shipping cost.

But there is plenty of easily accessible brown sand available in the dunes of West Texas. While lesser in grade, quantity is arguably more important than quality in this business. The native Texas sand also costs considerably less (about $30 per ton in some cases) and can be blended with white sand to achieve good results at a better price.

That’s why dozens of new sand mines are popping up in Texas and stealing market share from traditional sources.

While proppant is a relatively small part of overall drilling and completion costs, sourcing sand from a few miles away instead of the opposite side of the country can save approximately $500,000 per well. And there were 2,712 wells completed in the Permian Basin last quarter, according to the Railroad Commission of Texas.

That doesn’t count another 3,000 drilled but uncompleted wells — those just waiting to be fracked.

How To Profit
A staggering 50 billion pounds of sand will be used in Texas alone this year. That’s a strong tailwind for frac sand supplier Hi-Crush Partners (Nasdaq: HCLP).

HCLP has surged nearly 50% this week following a flurry of positive news. Among other developments, the company has just signed a major supply agreement with a key customer and unveiled expansion plans in Texas. It has also approved a whopping 233% increase in the quarterly dividend to $0.75 per share.

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