Expert Perspectives on the Frac Sand Market and Supply Chain DEMAND DRIVERS & L OGISTICS SUPPLY DRIVERS & INVESTMENT Taylor Robinson President Joel Schneyer Managing Director Over 25 years industrial supply chain executive experience with 5 years as PLG President 30 years as an international investment banker, financial analyst, and metals trader, with degrees in Mineral Economics and Geology
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Expert Perspectives on the Frac Sand Market and Supply Chain
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Expert Perspectives on the Frac Sand Market and Supply Chain
Over 25 years industrial supply chain executive experience with
5 years as PLG President
30 years as an international investment banker, financial analyst,
and metals trader, with degrees in Mineral Economics and Geology
Agenda for DiscussionAgenda For Discussion
I. Frac Sand Industry DriversWhat is behind movement in the market?- Oil Prices: The Reign of Tight Oil & Gas- Intensity: Oilfield Sand Demand- Resource Acceptance: Quality vs. Proximity- Logistics: Location, Location, Location
II. Market Expectations for Frac Sand BusinessesHow is competition changing?- Margins: The End to Growth at Any Cost- Moats: Regionalized Value, Distance Matters
III. ImplicationsWhere will the money go, and when will the party end? - Volume growth in sand demanded even at $50 oil- Quality/size no longer a selling point- Regionalization will intensify
I
II
III
Page | 2
I. Frac Sand Industry Drivers
Onshore Middle East
Offshore Shelf
Extra Heavy
Oil
Deep water
Onshore Russia
Onshore rest of world
Oil Sands
North American
ShaleUltra
deepwater
Tight Oil Is Here To Stay: US Competitive At New Breakeven Price
Page | 4
Source: Rystad Energy research and analysis, cited in: IMF. World Economic Outllook - Gaining Momentum? April 2017
Continued adoption of technology and streamlining of the manufacturing process
Oil Production (million barrels / day)
Oil
Pri
ce (
USD
)
Drilling Activity Is On The Upswing, Focused In Sweet Spots
Page | 5
0
500
1,000
1,500
2,000
2,500
Tota
l Nu
mb
er
of
Rig
s
Weekly Rig Count by Basin
Source: Baker Hughes, North America Rotary Rig Count Current Week Data, as of May 12, 2017
Middle Market M&A Transaction Multiples - Enterprise Value / EBITDA
Even though multiples were generally down in 2016, a quality premium is still observed where acquirersare willing to pay as much as 15% above comparable sellers for above-average financial performance
We have also seen a premium and accelerated timelines in sponsor-to-sponsor transactions
Source: Energent Frac Report data & company SEC disclosures as of May 2017
Large Overhang Of Capacity Has Been Sitting On The Sidelines
• ~ 108 million tons of industry capacity equates to 27 million tons per quarter of sand available for sale
• 4 public companies provide 50-60% of the industry’s current sand demands (note that numbers still coming in for Q1 2017)
Page | 25
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Q1
Pro
pp
ant
Sold
(M
M t
on
s)
Other Companies Hi-Crush US Silica Fairmont Santrol Emerge
Shifting Sands Marketplace Favors Local Sources
$210 million: July 2016U.S. Silica purchased brown-sand miner NBR Sand with plans to double output to 2 million tons/year
$275 million: Feb 2017Hi-Crush purchased Permian Basin brown-sand deposit with plans to produce 3 million tons/year at additional cost of $50 million
$20 million: April 2017Emerge purchased brown-sand mine from Osburn Materials to add 300,000 tons output near San Antonio, expand to 3 million tons/year by 2018 at additional cost of $40-60 million
Legend
Existing Frac Sand Mine
Recent Concentrated Drilling
Recent Acquisition Mine
Source: PLG Analysis
Recent Planned Mine Sites
Planned New Mines (as of May 2017)
• Winkler County, TX: Black Mountain’s 2 x 4 million tons/year facilities, pending air permits• Winkler County, TX: Wilks Brothers’ facility, pending air permit• Culberson County, TX: Former NBR Sands LLC management, pending air permit• Ector County, TX: Preferred Sands’ Letterkenny Ranch, initial air new source permit complete• Ector County, TX: Preferred Sands’ Mullingar Ranch, initial air new source permit complete• Clovis, NM:Delaware Sands LLC, completing engineering & financing
Page | 26
Page | 27
… But Water Scarcity May Be Barrier For Regional Sand Growth
Source: WRI Aqueduct 2014
Recent Sand Transactions Show a Developing Pattern
Notes:
Margin assumes 30% effective tax rate & 10% NPV
* with contingency payout based on performance
** assume $50 mm build out cost per HCLP press release
Date Buyer TargetAmount
(MM)Annual Tons Capacity
(‘000)$ / Ton
EBITDA MarginNotes
July 2016 SLCA NBR $210 2,000 $17.62 Regional Sand
August 2016 HCLP HCLP Blair $170 2,860 $8.65 Northern White
August 2016 HCLP HCLP Blair $180 * 2,860 $9.16 Northern White
February 2017 Source SP Blair $45 1,400 $5.43 Northern White
February 2017 HCLP HCLP Whitehall $140 2,860 $7.50 Northern White
February 2017 HCLP HCLP Whitehall $205 * 2,860 $11.00 Northern White
February 2017 HCLP Permian $325 ** 3,000 $20.62 Regional Sand
March 2017 TUSK Chieftain Sand $35 1,500 $3.94 Northern White
April 2017 EMES Osburn $20 300 $10.15 Regional Sand
$0
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0 500 1,000 1,500 2,000 2,500 3,000 3,500
EBIT
DA
Mar
gin
($
/To
n)
Annual Nameplate Capacity - Thousand Tons
$10/ton
Source: Company press releases, Headwaters MB research
Page | 28
III. Implications
High Intensity Drilling
Expanding
… Driving More
Development with Finer
Sand
… Enabling Regional Sand Market to Grow
… and Increasing the
Role of Trucking in the Supply Chain
• Latest generation of high intensity can add 25-40% recovery per well
Tying Trends Together Showcases Market Shift
• Sands nearby active basins will become the lowest delivered cost, displacing some current mines and transloading
• Trucking volume growth will drive innovation in storage solutions at well site
… Growing Focus on Last Mile Logistics
• 100-mesh sold out/in short supply for foreseeable future
• Minimizing resin-coated sand and ceramics usage
Page | 30
Increased Shale Oil Production
Flattens/Shrink Oil Prices
… Which Limits 2018+ Sand
Volume Growth
Shale oil is a victim of its own success for a second time
BUT
Shale Operations Are Logistics-Intensive –Challenges Pushing Downstream
Materials
Chemicals
Clean Water
Proppants
OCTG (Pipe)
Railcars to
Transloading
5
From local
reservoir /
well
Avg - 55
Largest - 240
5~8
Trucks to
Wellhead Site
20
~300,000
barrels
water / job **
Avg – 220
Largest - 960
20~32
Avg – 260
Up to 1,000
Truckloads
Oil / Gas / NGLsPipeline, Truck, Rail
-Note: A majority of
crude is still moved by
truck for some distance
at some plays
Waste Water Initially 2 barrels of
produced water per
barrel of Crude
increasing to 5 barrels
on average
Avg – 65
Up to 250
Railcars
Page | 31
* Example is for rail-delivered supply chain ** Horizontal/Directional well average in last 6 months (Energent Group)
Each well drilled requires:
Permian Activity – Shale Extent and Current Rigs
Legend
Permian Shale Layers
Active Permian Rig
Source: PLG Analysis, Baker Hughes, May 2017
Page | 32
Permian Activity – With Transload Locations
Legend
Permian Shale Layers
Active Permian Rig
Sand Transload
Page | 33
Source: PLG Analysis, Baker Hughes, May 2017
Permian Activity – With Existing Sand Mines
Legend
Permian Shale Layers
Active Permian Rig
Existing Sand Mine
Sand Transload
Source: PLG Analysis, Baker Hughes, May 2017
Source: PLG Analysis, Baker Hughes, May 2017
Page | 34
Legend
Permian Shale Layers
Active Permian Rig
Existing Sand Mine
Sand Transload
Announced Sand Mine
Permian – With Announced Mines
Source: PLG Analysis, Baker Hughes, May 2017
Page | 35
Permian Sand Trucking Will Grow Considerably Over Next 2-3 Years…
Legend
Permian Shale Layers
Active Permian Rig
Existing Sand Mine
Sand Transload
Potential Sand Mine
Frac Sand Truck
Movement
Page | 36
If Permian sand volume reaches 30M Tons/Year…• 1,200,000 truckloads/yr sand (if all are pneumatic trucks)
• Requires over 1,000 truck fleet
+ At 3M barrels/day of crude production…• 27,000,000 truckloads/yr produced water and crude hauling
• Requires over 10,000 truck fleet
…But With Growth Will Come With Growing Pains
Legend
Permian Shale Layers
Active Permian Rig
Existing Sand Mine
Sand Transload
Potential Sand Mine
Frac Sand Truck
Movement
Page | 37
Potential Impact/Concerns:
Access: • Limited routes in some areas• Truck congestion at major
intersections, in towns, and near high intensity well locations
Supply:• Are there enough
truck/trailers of the right configuration?
• Are there enough drivers?Price:• Inflation on trucking services
If Permian sand volume reaches 30M Tons/Year…• 1,200,000 truckloads/yr sand (if all are pneumatic trucks)
• Requires over 1,000 truck fleet
+ At 3M barrels/day of crude production…• 27,000,000 truckloads/yr produced water and crude hauling
• Requires over 10,000 truck fleet
Page | 38
• Increasing their product lines into resin coated sands to get out of commodity space
• Expanding and buying available capacity, and investing in regional sands
Diversifying
Product Lines
• Building out or partnering with transload operators to have “storefronts” in the shale plays
• Looking at “shipping box” and providing the last mile solution
Squeezing Value from
Logistics
What Are the Sand Companies Doing To Respond?
Minneapolis Hub for Delta Airlines• Subject to congestion and delays at hubs• High capital investment to cope with surge hours
P2P Route Map for Spirit Airlines• Minimizes connections and travel time• Reduced interdependency of flights
Source: Company websites
Airlines Analogy: Hub-and-Spoke Versus Point-to-Point
Page | 39
Will Boxes Replace Transloading And Pneumatic Trucks?
Utilize standard flatbed trucks which
eliminate pneumatic trucks
Allow more truck turns per day
Gravity fed into blender
Pooling model
No complex belt systems
No upfront capex or obsolescence risk
Significantly reduce exposure to air
particles
Reduce shrinkage of product due to
fewer transfers
“Shipping boxes” may offer advantages to the rail – trucking limbo for regional mine
shipments > 150 miles …
? Forklifts required at the well sites to
move boxes
? Safety concerns
? Truck turns will be limited by traffic
regardless of turnaround at well pad
? Space required for boxes at large,
high intensity fracks may create
unforeseen site permitting
constraints
? Boxes don’t maximize shipping
volume compared to bulk trucks
? Do they lower total delivered cost?
… but boxes also present other challenges
Page | 40
Proppant Demand Boom Is Widely Acknowledged And Optimistic
• Projected proppant rebound to ~ 61 MM tons in 2017, followed by ~ 78 MM tons in 2018
• Oil price trajectory suggests proppant markets may be optimistic
Goldman Sachs Wells Fargo RBC Oil Price - EIASource: • IHS Markit, Energy Blog, May 3 2017• Rich Shearer (President & CEO) Superior Silica Sand presentation at the Industrial Minerals 4th Frac Frac Sand Conference in Minneapolis Sept 13, 2016• Wells Fargo, Oil Service Statistics and Valuation Handbook, January 6, 2017• RBC Capital, Frac Sand Supply Demand Update, December 5, 2016• Energy Information Administration, Short-Term Energy Outlook, as of January 10, 2017, and Annual Energy Outlook, Table: Petroleum and Other Liquids Prices
Source: Energent Frac Report, data as of May 2017; Energy Information Administration, Cushing, OK WTI Spot Price FOB (USD per Barrel) as of May 2017
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• Proppant demand covaries with oil price with approximately a six month lag
Check The Numbers: No Free Lunch
Page | 43
• US proppant demand is set for a rebound… but the proppant forecasts seem too optimistic and do not appear to reflect the oil price, supply-demand feedback loop
Source: • Energy Information Administration, Short-Term Energy Outlook, as of January 10, 2017, and Annual Energy Outlook, Table: Petroleum and Other Liquids Prices • Headwaters MB research, correlation of historical proppant, oil price, and production• Energent, Frac Report data as of January 2017
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Continental Onshore USA Tight Oil & Gas Production
The Frac Sand Industry Scorecard
Page | 44
LONG TERM WINNERS
“Point-to-Point” Regional Sand
Suppliers
(lowest delivered cost)
Big “Hub & Spoke” Northern White Mines
(unit train loading on Class I rail, storefront
access in-basin)
Movable In-Basin Storage Solutions
(last mile solution)
Regional Truckers
(replacement of long-distance railcar supply)
Mixed
Rail-to-Truck Transloads
(could be overbuilt as regional sands become
more available)
Destination Short-line Railroads
(loss of market share to regional truckers)
Southern White Sand Mines in MO & AR
(proximity to highest demand basins)
LONG TERM LOSERS
×Marginal Northern White Mines
×(need to truck to outbound transload)
Class I Railroads
(reduced market share to trucking)
Origination Short-line Railroads
(extra layer of costs is challenge to competition)