One nook of America’s shale industry is eyeing a big comeback

By David Wethe on 8/4/2016

HOUSTON (Bloomberg) -- Amid the gloom and doom that’s set in all along America’s shale fields these past two years, there has been one small, but consistent, bright spot. Sand, it turns out, is a much greater tool in hydraulic fracturing than drillers had understood it to be. Time and again, they’ve found that the more grit they pour into horizontal wells—seemingly regardless of how extreme the amounts have become—the more oil comes seeping out.

The message from drillers is “more, more, more sand,” said Sean Meakim, an oil-services analyst at JPMorgan Chase & Co. “All of the numbers are going up and they’re going up dramatically.”

On a per-well basis, sand use has doubled since 2011, climbing to nearly 8 million pounds, according to consulting firm IHS Inc. It’s this growth that’s sent the stock prices of the country’s four publicly traded sand miners surging more than 90% this year. True, overall sand usage in the fracing industry is still way down from the 2014 peak, but the per-well increases have analysts and investors betting that the sand industry will boom again as soon as fracing activity starts to pick up even a little bit.

That moment may seem far off right now as crude prices careen again—they’re down 20% since briefly touching $51/bbl in early June—but oil-service giants Schlumberger Ltd. and Halliburton Co. have both seen enough positive signs on the ground to declare in recent weeks that the industry has bottomed out. And if prices were to resume their rebound and just manage to climb above $60/bbl, some 40% below pre-crash levels, analysts at Jefferies Group and Bloomberg Intelligence predict that total sand demand will soar past 2014’s record 64 million tons in as little as two years.

Sand is by no means new to the oil industry, but it’s taken on an importance in fracing that it never had in traditional vertical-well drilling. Because shale rock is so dense, drillers rely on large quantities of both sand and water to tease the oil out.

Another thing they’ve discovered during the downturn is that the extra money they had been shelling out for white sand shipped in from Wisconsin and Minnesota, instead of the brown sand found in the Southwest, may not have been worth it. While white sand is stronger, brown sand—which can run as much as 25% cheaper at about $60 a ton—has proved to be equally capable of maintaining cracks open.

Brown Sand

This is why sand mines in Texas and Arkansas have been a lot busier of late than those up north. U.S. Silica Holdings Inc., the largest publicly traded frac-sand miner in the country, estimates that brown sand now accounts for more than 40% of the market, up from 16% in 2014. Two weeks ago, the company said it was buying NBR Sand, a brown-sand miner not far from Texas’s main oil fields, for $210 million with an eye to more than double output there to 2 million tons a year.

U.S. Silica’s shares have nearly doubled this year, while Fairmount Santrol Holdings Inc. tripled. Hi-Crush Partners LP rose 105% and Emerge Energy Services LP climbed 92%. In comparison, E&P companies in the S&P 500 rose 14%, while those in a broad oil-services index are little changed.

“People are uber uber bullish on sand,” said Matthew Johnston, an oil-services analyst at Nomura Securities. “I get it. I understand where all the euphoria is coming from.”

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