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Frack Sand Providers Struggling to Stay Afloat: This is Why

Nilanjan Choudhury

According to the EIA, volume from U.S. oil fields has risen more than 50% since mid-2016 to 12.9 million barrels per day. This backdrop should bode well for the providers of technical products and services to drillers of oil wells, aka the oilfield equipment and service companies. Considered the backbone of the exploration and production companies, oilfield service providers should be a prospering industry with lots of growth opportunities.

On the contrary, they are facing an extremely challenging operating environment. Bulk of the industry is struggling despite record-breaking oil production. In particular, things are looking bleak for the suppliers of frack sand – something that is used extensively in the hydraulic fracturing process.

Even as oil and natural gas production in the United States have been reaching one high after the other, the stock prices of most frack sand providers have fallen substantially from where they were a year ago. Some names have gone bankrupt, while few have warned of more stress ahead.

Just last month, CARBO Ceramics Inc. CRR, a seller of frac sand, raised doubt about its ability to continue as a going concern. Currently trading well below $1 a share, the Zacks Rank #4 (Sell) stock has lost 90% over the past 12 months. Meanwhile, Hi-Crush Inc. HCR had to shed its MLP status, eliminate dividend and convert to a C-corp to free up cash. Amid all this, shares have slumped 79.1% so far this year. Earlier, this summer, Emerge Energy Services L.P. declared Chapter 11 bankruptcy protection.

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Not just CARBO Ceramics or Hi-Crush or Emerge Energy Services, a number of frac sand providers are struggling to stay afloat, indicative of a broader problem in the industry.

Let’s understand why.

The Use of Frack Sand

Sand is a critical ingredient in the hydraulic fracturing process. Used as a proppant, sand is a key material (along with water and chemicals) that is injected to open up cracks (or fractures) in underground hydrocarbon-bearing rock formations (shale), allowing the release of oil and natural gas.

Shale Production Boom Drove Sand Demand

With the advent of hydraulic fracturing (or fracking), shale production boomed in the United States. Coupled with sophisticated horizontal drilling equipment that can drill and extract oil/gas from shale formations, the new technology revolutionized U.S. energy supplies. Consequently, oil and natural gas production kept growing.

As the United States embraced shale revolution, frac sand demand surged. By 2016-2017, a number of investors put their money into sand mining companies to take advantage of the steep rise in the use of frac sand.  

But that Same Shale Revolution Then Proved to be a Disaster

For operators in North America, where oil production has reached record levels, it’s more about the returns and not growth. The volatility in commodity price has convinced explorers and producers to take a relatively conservative approach on capital expenditure programs. This shift in customer strategy has resulted in an equipment supply glut thereby squeezing profitability on services like fracking.

Companies that supply sand for hydraulic fracturing operations have been among the hardest hit in the shale spending slowdown as the weakness in oil prices force producers to dial back on drilling activity.

What are the Ongoing Woes?

It’s not that sand usage has come down in the hydraulic fracturing process. In fact, amounts of sand used to enhance the flow of newly drilled wells is only growing. The problem is the availability of too much sand in the face of a drilling slowdown.

As a proof of the lackluster drilling activity, Baker Hughes BKR, in its latest report, has put the number of oil-directed rigs at 663 - the lowest since March 2017. The shift in customer strategy (resulting in capital expenditure cutbacks) has resulted in declining demand for oilfield services and put pressure on pricing. Consequently, the price charged by frack sand providers has plummeted from some $90 per ton to roughly $15-$20 recently. Add transportation costs and this translates into significant loss of cash.

Will the Pain Continue?

Capital expenditure cuts across the board, lay offs and plant shutdowns have been the order of the day. However, the market still remains oversupplied and prices are plumbing new depths. While demand for frac sand is expected to remain healthy – mostly on the back of record Permian Basin Production – it might take some more capacity idling to move the needle on the struggling sector. Till then, one needs to steer clear of operators like CARBO Ceramics, Hi-Crush, Covia Holdings CVIA or Smart Sand, Inc. SND.

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Baker Hughes Company (BKR) : Free Stock Analysis Report
 
SMART SAND INC (SND) : Free Stock Analysis Report
 
Carbo Ceramics, Inc. (CRR) : Free Stock Analysis Report
 
COVIA HOLDINGS (CVIA) : Free Stock Analysis Report
 
Hi-Crush Inc. (HCR) : Free Stock Analysis Report
 
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