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The Sand Man Called – He’s Sold Out

Thank you again for your emails and phone calls. It is great to reconnect with so many folks. Many shared feedback and thoughts regarding our last article. I will visit the glass ceiling concept later.

First, let’s look at the market. As predicted, the week after our last article, cutbacks from OPEC were reflected in reduced U.S. oil deliveries, which was about 6 weeks from the start date. It takes a tanker that long to arrive from the Middle East. The EIA showed U.S. crude stocks down 237,000 barrels, the first weekly decline after nine straight increases. Analysts forecast a 3.7M barrel increase! Oooops…..

The IEA forecasts demand to overtake supply in the first half of 2017. Data suggests U.S. demand will rise with summer driving on the way and two record years of SUV and truck sales since 2015. Keep watching supply numbers……and, look beyond the U.S. data:

• Japan’s supplies are down by 6% in January.
• Europe’s supplies are down by 2% YTD.
• Singapore and SE Asia floating product stocks are lower by 5% over the last 5 weeks and
China’s crude oil and refined products in floating storage are down 7% YTD.
• Even in the lagging US, USGC gasoline stocks (the world’s largest gasoline storage hub) are
-3% y/y over the same period………

See: http://oilprice.com/Energy/Energy-General/Why-Are-Oil-Markets-Ignoring-All-These-Bullish-Signs.html – “Why Are Oil Markets Ignoring All These Bullish Signs?

Big companies have been buying and contracting leases in the fracking fields over the last few years. It is estimated that Chevron, Exxon, and Mobil are investing $10 billion in 2017. I’d say Exxon could be a good stock buy.

Now, About that Glass Ceiling on Sand Prices…..

I don’t have a crystal ball, but history teaches us a few things about what is coming. A glass ceiling forms over sand prices when they are too high for frackers to be profitable. Let’s face it, profit margins are down since the days of $130/b. Demand drives up prices, especially when there are supply shortages. Sand prices are up in the last few weeks. We will quickly learn just how high prices will go before frackers walk away. When that happens, prices will soften. A glass ceiling could also show up on guar, barite, chemicals, and other logistics and services, as well. Welcome to Economics 101.

Right now, sand landed in the Permian is at about $85/ton and rising. I just saw a quote at $105. It was declined, even though the engineer needed it last week. So, how much higher can they go before demand drops off?

This question takes us into Economics 102…..There is another pathway to take when prices are too high: eliminate the middle man. Research on the evolution of companies on the DOW, shows a pattern, which the frack sand industry is following. The stages are as follows (I changed the terms for simplification):

DISCOVERY: I’d say we know where most of the sand is located and what grades and sizes. And, pumpers have a pretty good idea of what works best and where.

REFINEMENT: Miners are making sand faster, more efficiently, and improving the sand. New innovations, especially in processing are here. Have you seen the system that can increase the crush strength, improve turbidity, costs under $2M to build, has lower maintenance and operations costs, and can produce 300 tons/hr? Amazing offering!

HORIZONTAL INTEGRATION: Frack sand is coming from Texas, Wisconsin, Utah, Ohio, Arkansas, Oklahoma, Mississippi, Wyoming, Michigan, Canada, and no, not Mexico. And, if some guy tells you he has a 20k crush sand, just laugh. Companies processing closer to the plays are positioned to offer lower prices with reduced logistics costs. Decentralized production creates regional competition and establishes horizontal integration.

CONSOLIDATION: Mergers and acquisitions by competitors are in play. Sand companies are buying more reserves and projects. Call us if you would like to buy or sell. We connect buyers and sellers direct.

VERTICAL INTEGRATION: A company offering mine to well service or a one stop shop makes it easier on buyers. A sand mine owning railcars, transload sites, and/or trucking services reflects vertical integration in the sand sector. EOG owning a sand operation is vertical integration in the fracking sector.

NARROWING: Are you familiar with the banking industry where big banks buy up the little guys? Get ready. If a company is fracking and can’t get sand, they have a serious problem. We have already heard of numerous crews sitting idle waiting on sand. The solution? If you can’t buy the sand, buy the mine. The operations which own mine to well resources and multiple reserves are the best picks. If demand keeps going, frackers, who don’t own resources, could be out of luck.

Every offer of processed sand we have received in the last month has been sold.

When Disney went in to build Disney World in Orlando, they sent guys using different business names to protect their strategy and plans. Prices go up when owners sense there is an open checkbook in the neighborhood. If you own reserves or an operational project, get ready…..they are coming.

Yes, there are quite a few new sand projects coming on line. We have 11 on our list. We have been offered reserves with permitting, a used processing system, screens, and a bargain on a 200 t/hr drying unit. Purchasing used equipment to get operations going more quickly is a plus.

For a season, new projects won’t meet demand and then….. the market will convert to a buyer’s market. Some projects will belly up because they were late to the party. Wise owners will know when to hold and when to walk away. As end users buy their own mines, the number of buyers will grow smaller. Mines that have contracted production will likely hum along just fine. Timing is key. Greed could leave some miners with a great big sandbox for their grandkids.

One thing in our fracking favor is that we can gear up production more quickly than other resources. Fracking will continue to play an important role in the strategy of major producers, so it is here to stay. If you are a middle man, this may be the finest hour for you to reap the rewards of your hard work!

Have a great week.
Jen
407-810-3102

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