The Impending Sand Industry Consolidation Petroleum Connection 5 th Annual Sand Supply & Logistics Conference San Antonio, Texas Joel Schneyer – Managing Director [email protected] 303.619.4211 October 13, 2016
The Impending Sand Industry Consolidation
Petroleum Connection 5th Annual Sand Supply & Logistics ConferenceSan Antonio, Texas
Joel Schneyer – Managing Director
October 13, 2016
US Proppant Demand Plummeted But Is Set to Rebound
• Proppant demand fell approximately 20% between 2014 and 2015 and current run rate for 2016 is in the 25 to 30 million ton range – approximately 35% less than 2015
• Projected rebound to 50 million tons in 2017, Texas leading the way
102.9 billion pounds(51.5 million tons)
85.4 billion pounds (42.7 million tons)
26.1 billion pounds – YTD(13.1 million tons)
Return to 2015 consumption in 2017
( ~ 50 million tons)
Page | 2
Pro
pp
ant
Co
nsu
mp
tio
n (
bill
ion
lbs)
100
75
50
25
0
Source: Energent Group
2016 est. 25 – 30 million tons
Source: adapted from NavPort Presentation (April 2015), Canadian Frac Sand Logistics & Market Forecast Summit in Calgary & company websites
Top Sand Producers Embrace The Value of Innovation
Page | 3
Pe
rce
nt
of
Cap
acit
y M
arke
t Sh
are
Chieftain
Badger Mining Corp
EOG
Eagle Materials, Inc.
Hi Crush Partners
Preferred Sands
Superior Silica Sands
Santrol
US Silica
Unimin
50%
60%
70%
40%
30%
20%
10%
0%
• Atlas Resin PRC & CRC• Refugio, Texas resin coating plant
• Polymeric Proppant Line, DustPro, FloPRO PTT Proppant Transport Technology
• SandGuard & SandMaxx
• Propel SSP Transport Technology, Curable RCS, Precured RCS
• InnoProp PLT, InnoProp Python
• Unifrac RCS and DustShield
Source: Company and Private Equity press releases and websites
Private Equity Continues To Be Active In the Space
Page | 4
Files new S/1 for IPO as an “Inc” Sept 2016
Files new S/1 for IPO as an “Inc” Sept 2016
Key Point #1 : Sand Overcapacity & Innovation
Industry can produce in the range of 100 million tons of frac sand annually, with the top 10 sand producers controlling about ~2/3rds of the market capacity. The industry built big, efficient mines and distribution hubs in WI, IL, and MN to meet this growing demand …
… but in 2016 sand consumption is forecast to be in the range of 25 - 30 million tons with a rebound to 50 million tons in 2017.
Therefore sand production utilization in 2016 is a very low 25% - 30% …. with little market discipline.
Page | 5
At the same time, sand producers have embraced new products for competitive advantage and better profitability, to shift away from commodity products and pricing.
Completion Trends Create New Proppant Demand Drivers
Page | 6
Lon
ger
Late
rals
Mo
re S
tage
s
Ove
rpac
kin
g
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2012 2013 2014 2015
Average Sand per Well (Permian/ Bakken/ Eagle
Ford)
Clo
ser
Wel
l Sp
acin
g
> 2
x in
crea
se
20
16
to
20
18
0
5,000
10,000
15,000
20,000
25,000
2014 2016 2017 2018
# Horizontal Wells
0
200
400
600
800
1,000
1,200
1,400
2014 2016 2017 2018
# Active Horizontal Rigs
• Increase in frac sizes per stage
• Increased interest in utilizing finer mesh sand (40/70 & 100 mesh) & CRC
Source: Goldman Sachs Global Investment Research (July 2016), Bloomberg Intelligence 0
500
1,000
1,500
2,000
Permian Williston EagleFord
Pounds Sand Per Lateral Foot
2012 2016
Trend Shows Increasing Proppant Volume Demand Per Well
Page | 7
Source: Energent Group
Industry Average Proppant per Job
EOG Average Proppant per Job
3,000 tons
6,000 tons
To
ns
To
ns
~ 75% increase in 18 months
38 Frac Jobs In Last Year Used Greater Than 25 M Lbs. Of Proppant
Page | 8
Note: N = 209 frac jobs between October 1 2015 – October 1 2016
Source: Energent Group
Nu
mb
er
of
Fra
cJ
ob
s
Proppant Volume Used Per Job (Million Lbs)
Key Point #2: Increasing Completion Density Creates Demand
Page | 9
Shale drilling has become more efficient and the industry can drill more wells in the same amount of time…
… and average sand use per well has gone up ~40% from 2012, with industry leader EOG using 2x as much proppant per well as industry averages
… thus the rig count will not represent the ongoing demand for sand.
Source: C.L. Dake, Univ of Missouri School of Mines & Metallurgy Bul. Tech. Ser., Vol. 6, No. 1 August 1921
Sand Supply - St Peter the Patron Saint of Frac Sand
40/70 & 100 mesh : Southern White
20/40, 40/70 & 100 mesh : Northern White
Page | 10
14% > 40%
share market
$210 million
Brown sand market penetration estimated to have increased from 14% in 2014 to more than 40% currently
U.S. Silica purchased brown-sand miner NBR Sand in July 2016 with plans to double output near Texas oilfields to 2 million tons/year
Regional Sand A Growing Source of P2P Cost Savings
Page | 11
Major Northern or Whitefrac sand producing region
Major Texas Brown, Brady Brown, Hickory, and other sand types
Sources: Bloomberg Markets “The Next Shale Boom Will Be Built on Sand” (August 3, 2016), PacWest (2014)
Key Point #3: Lower Sand Specifications Drives Local Sourcing
Page | 12
If coarse 20/50 sand is no longer specifically required for well completions,
… it stands to reason that sand origin points closer to the end-user, taking advantage of point-to-point distribution are the low cost solution.
… and locally sourced Brown or Regional Sand gain market acceptance,
Eagle Ford In-Basin Delivered Cost Estimates
Page | 13Source: Headwaters MB research
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
mining/processing outbound transload barge
rail truck rail line switch
short line inbound transload 3rd party transload fee
Co
st P
er
Ton
Regional Sand$45-49/t
Southern White Sand
$52-58/t
Northern White Sand
$60-65/t
unit train & volume discounts
Northern White Sand
$65-68/t
unit train
Northern White Sand
$71-75/t
unit train & volume discounts & rail line
switch
Northern White Sand
$82-86/t
manifest
Northern White Sand
$93-99/t
manifest & rail line switch
Northern White SandSouthern
White SandRegional Sand
Airlines Analogy: Hub-and-Spoke Versus Point-to-Point
Page | 14
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
Sources: Company websites
Sand producers and independent transload operators will continue to crowd each other for the same economic pie...
Key Point #4: Shift To “In Basin” Sales Is Defining Survival
… thus, capturing access to the closest point-to-point sand supplies and the lowest cost in-basin terminals (i.e. unit train & dual track service) is critical for long-term survival.
… and no clear alternatives exist for both to make profits unless they utilize the lowest cost logistics chain….
Page | 15
Supply Chain Profit Squeeze: Delivering Sand to Well Sites
Page | 16
$15 - $30 / ton
$30 - $60 / ton
$7 - $20 / ton $15 - $50 / ton
In-basin sales of frac sand is a game changer: The frac sand producer must now work into his economics all the costs of production and delivery of products through to the “Basin Transload”
Sources: Headwaters MB research
Sources: SEC Edgar, Yahoo Finance, Headwaters MB research
Industry Metrics: Transload & Frac Sand Producers
$9.50$10.75$10.50
$17.50$21.75$18.00$17.25$15.25$14.50$16.75
$20.75
$19.75$25.75
$3.75$3.00
$4.00
$10.50$10.00$9.25$7.75$10.00$9.50$10.25$9.50$13.75$16.75
$54.58$61.12
$65.35$69.26
$78.50
$93.99
$99.45$98.86
$93.20$95.25$87.87
$84.85
$59.64$63.57
-$9.57-$8.47
$7.23$8.67
$14.76
$25.28$31.34
$34.97$30.14
$27.11$26.22$28.91
$23.34
$25.94
-$20
$0
$20
$40
$60
$80
$100
$120
2016Q22016Q12015Q42015Q32015Q22015Q12014Q42014Q32014Q22014Q12013Q42013Q32013Q22013Q1
Transload Revenue / Ton Transload EBITDA / Ton
Frac Sand Producer Revenue / Ton Frac Sand Producer EBITDA / ton
FOB Mine
In Basin Sale
$ P
er
Ton
Page | 17
Sand Producers Building Out Destination Rail Terminals
Page | 18
Sources: Company websites
Key Point #5: Value Seen In Streamlining the Supply Chain
Sand producers are looking to reduce the overall in-basin delivered cost structure,
… thus, • sand producers will look to eliminate line
switching from sand origin to destination wherever possible,
• the use of unit trains will increase, and• producers will seek to control
(ownership?) the best in-basin terminals.
Page | 19
Quarterly US Proppant Demand – Texas Leading the Way
Page | 20
Pro
pp
ant
Co
nsu
mp
tio
n (
bill
ion
lbs)
30
20
10
0
Source: Energent Group
Eagle Ford Ranked #1 in Economic Returns by EOG
Page | 21
Source: EOG Presentation at JP Morgan Energy Conference 2016
Global Liquid Supply Cost Curve is Dynamic (and Getting Flatter)
Source: modified from Rystad Energy, Investing.com, Headwaters MB research
USD
/bb
lBreakeven cost curve
Page | 22
10 Year Bond YieldCanada = 1.07%USA = 1.70%Qatar = 3.06%Mexico = 6.12%Columbia = 7.28%Russia = 8.13%Turkey = 9.45%Brazil = 11.63%Egypt = 17.50%Venezuela = 21.12%
Onshore
Russia
Extra
Heavy
Oil
Ultra
Deepwater
a
Key Point #6: Risk Adjusted Returns Will Drive Drilling Activity
… with some of the best return profiles coming from the Eagle Ford & Permian basins
Page | 23
Competitive advantages are awarded to assets that can provide the greatest risk adjusted returns …
... and the return profile of North American shale is competitive globally
Source: Company and Private Equity press releases and websites
Sand Industry Update – Transactions of Interest
Page | 24
Date Target Description AcquirerTransaction
ValueOct-16 Arrows UP Purchase of interest in shipping "box" bulk transport system OmniTrax Equity interest
Sep-16 Sanjel/Terracor Court approved acquisition of three frac sand transloadterminals and undeveloped WI frac sand mine out of CCAA
OmniTrax $19.5 million
Sep-16 Hi-Crush Blair LLC Acquisition of northern white sand mine in Blair, WI with 2.86 million tons of annual capacity
Hi-Crush Partners LP ~ $166 million
Aug-16 Sandbox Enterprises LLC Acquisition of frac sand shipping "box" logistics solutions provider
US Silica Holdings Inc $218.3 million
Jul-16 NBR Sand LLC Acquisition of regional brown sand mine in Tyler, TX with T12M sales of 740,000 tons
US Silica Holdings Inc $210 million
Jun-16 Emerge Energy Services Operating LLC
Sale of Emerge's fuels business the Sunoco Parties $178.5 million
Jan-15 Preferred Sands LLC Acquisition of regional sand producer Hanson Lake in Saskatoon
Gordon Brothers Group and Hilco Industrial
~ $30 million
Date Issuer Description Owner IPO Value
Sep-16 Muskie Proppants Portfolio company of PE Wexford Capital and portfolio partner Gulfport Energy file IPO for energy services rollup Mammoth Energy Services Inc
PE Wexford Capital ~ $128 million
Sep-16 Smart Sand Inc Portfolio company of PE Clearlake Capital files IPO PE Clearlake Capital $100 million
Date Seller Description Offering Type Gross ProceedsAug-16 Emerge Energy Services LP Sold new Series A Preferred Units to institutional investor Unit Offering $20 million
Aug-16 Hi-Crush Partners LP Priced 6.5 million units at $12.35/unit Unit Offering $80.3 million
Jul-16 Fairmont Santrol Priced 25.00 million shares at $5.94/share Share Offering $148.75 million
Distance Matters: Estimated Delivered Cost of Sand To Eagle Ford
Page | 25
Source: Headwaters MB research (2016); U.S. EIA based on data from various published studies as of April 2015
Red : > $82/ton manifestOrange : ~ $60 - $75/ton unit trainsBlue : ~ $52-58/ton rail & bargeGreen : ~ $45-49/ton truck
Lower 48 Shale Plays and Major Sand Basins
Closing Thoughts ...
The impending sand industry consolidation will be driven by:
Thank you
Headwaters MB named Investment Bank of the Year for the second consecutive year
INVESTMENT BANK OF THE YEAR
INVESTMENT BANK OF THE YEAR
2015
Page | 26
• Interest in increased liquidity via:
• Asset sales
• Share offerings
Financial Health
• Curable resin coatings
• Dust coatingsInnovation
• Terminals
• Unit trains
• “Box logistics”Logistics
• Acquisition of sand mines closer to the in-basin sale (Regional & Southern White Sand)
Optimized Sourcing