Hi-Crush Partners LP (HCLP) and Smart Sand (SND) are due to report earnings on August 2nd and August 10th, 2017 respectively, unfortunately, I was held up in my blog writing and was not able to finish until now. Both of these companies fall under the sand fracking sector, which fell onto my radar after a Barron’s article, “We Have a Big ‘Crush’ on This Cheap Energy Play.” Since the article, HCLP has dropped about 50% and has been struck by several analyst downgrades, mainly caused by fears that the energy sector will continue to be pressured by low oil prices.
Frac sand companies generate revenue by selling high-quality sand to natural gas and oil rigs, which use the sand in a hydraulic fracturing process to increase the amount of oil and natural gas they can extract from wells. High-quality sand is a crucial part of the extraction process, as it allows for horizontal drilling and enables the miner to extract a higher percentage of oil out of the wells. Most sand fracking companies have their largest mines located in Wisconsin, as the state has access to higher quality sand which allows for access to deeper oil and natural gas reserves. However, due to the recent high demand of sand, several companies such as HCLP and SLCA have started investing in opening up lower quality sand production centers in Texas, for the dual purpose of increasing sand supply to meet demand, and to remove transportation costs to one of their largest customer sites in Texas.
The largest concern for analysts covering sand fracking companies is that depressed oil prices would reduce the volume of oil production, which would, in turn, lower demand for sand and weigh on profits. Analysts argue that the expansion of sand mines in Texas will drive the supply of sand up, thus reducing the price companies can sell sand at, thus reducing profits.
While the price argument by many analysts may initially seem logically sound, research into the world production of oil completely independent of oil price shows a steady increase over time. Here is a more up to date chart…
Furthermore, as can be seen at http://peakoilbarrel.com/world-oil-yearly-production-charts/, most countries have a clear uptrend or downtrend in oil production over the last 8 years, showing the growing dominance of a few countries in the production of oil. One of the companies locked in an uptrend is the United States. Here is a more up to date chart…
Although there is upbeat news of oil production volumes increasing, analysts argue that the increase in volume is not sustainable if oil prices stay low. However, I view high oil production volumes to a high need for the demand of sand. A quick search seems to justify my reasoning, as a Wall street journal article, “The Rocketing Price of Sand,” shows that the rate at which sand is used is steadily increasing.
On the other side of the equation, one must look at the price of sand as a commodity. Sand prices had been falling from 2015-2016, but shows an increase in sand prices since the beginning of the year.
Looking at the chart of sand fracking companies, their stock price has been hit hard the past year. Despite positive news in sand demand, sand pricing, and oil production, analysts have turned their attention to low oil prices to justify the bearish view on sand fracking customers.
The next clue to a change in momentum are the positive earnings and guidance several sand fracking companies have announced, as well as news of reduced oil production around the world. First, SLCA, a similar sand company, had a rather upbeat report, citing “strong market demand drove record sales volumes and substantial price improvements,” and “we were producing and selling near our maximum […] capacity” but “logistical challenges related mostly to railcar availability and inconsistent demand for core sand limited sales early in the quarter.” SLCA also announced that they are “scaling up the business rapidly to meet growing customer demand.” Despite this earnings report seemingly suggesting great future sales, investors focused on the miss on revenue due to railcar availability and the stock fell 10%. Furthermore, there is positive news for U.S. oil companies with news of Saudia Arabia cutting exports of oil, which “would theoretically remove an additional 600,000 barrels a day from the market.”
HCLP had a great earnings report, handily beating earnings per share, revenue and profit estimates, and announced they expected the price of sand to continue to rise. They opened their Texas sand plant two months early and under budget, which would allow them to produce sand at maximum capacity in the next quarter. Even if sand prices were to fall, I believe their profits would still benefit with the production of sand in their Texas plant, which removes of the transportation costs from Wisconsin. However, the quality of sand in Texas is not as high, so there are further variables in play here. The two charts below taken from their earnings report outline their capabilities to ramp up sand production and thus their profits in the foreseeable future.
SND is a similar company which only supplies sand from Wisconsin, but has consistently generated profits while other sand fracking companies took a loss in previous quarters. I believe the entire sector has upside but saw SND’s consistent profits, and HCLP’s expansion into Texas and great execution as their standout points.
HCLP is one of the worst performers in my portfolio, having fallen over 30% since I acquired shared in on July 7th, 2017.
Note: The information provided may not be accurate, they are drawn from third party sources and readers are encourage to cross-check values before using the information for personal investing purposes. Any assumption or forward-looking statements may not play out as stated, and any financial risks are undertaken at the owner’s own risk.