Released November 18, 2019 | SUGAR LAND
en
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The industrial sand market has been crushed, a victim of excess supply, weakening demand and falling prices. Frac sand facilities have been closing over the last two years, and in their third-quarter earnings calls, company executives predicted further closings or cutbacks. Weak market conditions could cause proposed new sand projects to be cancelled or pushed back.
"This has been brewing for some time," said Joseph Govreau, Industrial Info's vice president of research for the Metals & Minerals industry. "The current market situation puts in jeopardy more than $800 million in frac sand mine and transloading projects that IIR is tracking in North America."
Since the start of 2017, 39 frac sand projects valued at about $2 billion have been completed, according to Industrial Info's Global Market Intelligence (GMI) Platform. Twenty-six of those 39 projects, valued at about $1.7 billion, are located in Texas. They were built to serve burgeoning local demand from Oil & Gas operators in the Permian and Eagle Ford shales of Texas. Local sand facilities in Texas were seen as a lower-cost alternative to transporting sand from the Upper Midwest. For more on the shifting dynamics of the frac sand market, see September 19, 2017, article - Economics of Fracking in Texas May Shift with Planned Frac Sand Projects and October 1, 2018, article - Is the Frac Sand Gold Rush Over?
But developers have cancelled or placed on hold 17 proposed sand projects valued at about $881 million. These projects were scheduled to begin construction between January 2017 and December 2020. Eight projects scheduled to be constructed in Wisconsin have been cancelled or delayed; the aggregate value of those projects was about $510 million. Texas has the second-most number of cancellations or delays, with five, followed by Utah, Arkansas, Ohio and Missouri, with one proposed project each.
Over the last two years, 19 frac sand facilities have been closed or shuttered. Most of these projects (14) are located in Texas, according to Industrial Info's GMI Platform.
The carnage in the sector is evident in the plummeting stock prices of leading publicly traded companies like U.S. Silica Holdings Incorporated (NYSE:SCLA) (Katy, Texas), Covia Holdings Corporation (NYSE:CVIA) (Independence, Ohio), Hi-Crush Incorporated (NYSE:HCR) (Houston, Texas), and Sand Smart Incorporated (NASDAQ:SND) (The Woodlands, Texas). All of those stocks have fallen between 78% and 94% since the start of 2017.
A sample of comments from frac sand company executives on third-quarter earnings calls confirms the industry dynamics and sketches a future of additional production cutbacks, facility idlings and price cuts.
Several executives said their companies had removed supply from the market, and predicted further withdrawals.
On October 29, U.S. Silica Holdings Chief Executive Officer Bryan Shinn said: "Over the past few months, we've taken approximately 5 million tons of Northern White and regional sand capacity off-line through a combination of reducing hours worked, or completely idling plants... My expectation is that we'll see another 10 million to 15 million tons come off-line (across the industry)." He said he expected more mine closures over the next few quarters. Northern White sand comes from the upper Midwest region, chiefly Wisconsin and Minnesota.
On a November 6 call with investors and analysts, Bob Rasmus, chief executive of Hi-Crush Incorporated, said: "The non-cash impairments, which we recorded during the quarter ... reflect the reality that the industry is undergoing a drastic change. The market is over-supplied and will be rationalized; whether through attrition and/or consolidation. We are seeing it happening in the form of mine closures, idling and curtailed hours of operation... We believe there will be additional supply taken off the market over the next several months as higher-cost production is removed."
"Despite the supply rationalization that we've seen to-date," Rasmus continued, "oversupply persists which led to increased pricing pressure in the back half of the quarter ahead of what was originally expected... Against that backdrop, we've seen probably four or five plants in the Permian itself that have been idled, come offline or substantially reduced hours of operations... I think that the Permian, overall, in terms of capacity, is oversupplied by about 15 to 20 million tons that still needs to come offline in that. In the Northern White sector, we've seen additional supply come offline, additional idlings, and I still think that there's probably 10 or 15 million tons ...that needs to come offline in Northern White" capacity.
Turning to demand for frac sand, U.S. Silica Holdings' Shinn said: "For (the) oil and gas (market), we expect industry frac sand volumes pumped in Q4 to be down at least 10% sequentially due to the expected seasonal slowdown. Pricing will be under further downward pressure... Northern White sand held up pretty well. It was only down about 6% sequentially in Q3."
"Many people have written (about) the demise of Northern White sand," Shinn commented, "but it's still holding up pretty well in the market. Believe it or not, we hit a new Northern White sand volume record sold in July. And we saw a pretty robust demand before things cooled off in the back half of Q3." On the subject of prices, this executive said he expected "more pressure for sure. It was down about 15% sequentially. That trend is really making it difficult on some of these new mines and new operators that have come into the industry."
Rick Navarre, chief executive of another sand company, Covia Holdings, said on November 6: "Customer budget exhaustion has led to sharp decline in demand, and this is expected to continue in the fourth quarter. Looking further into 2020, longer-term visibility remains challenged. However, most of our customers expect activity to bounce back in the first quarter as budgets refresh."
Navarre continued: "It is our view that pricing has fallen well below the level of all-in cash production costs for many proppant producers, particularly when factoring in SG&A (selling, general and administrative expenses), maintenance and capital spending. This cannot continue indefinitely and has resulted in reduced economical production capacity. We expect this trend to continue in the near term in most basins, particularly in the Permian, which has the greatest supply-and-demand imbalance... We see the fourth quarter this year being more challenging than what we saw last year from a pricing perspective. Volumes will be lower than what they were in the fourth quarter of last year as well."
Hi-Crush's Rasmus said he expected "continuing headwinds for the remainder of 2019...Everybody anticipates Q4 to be slow, and I think that there's not going to be any new market share in 2020... And that's our strategy is to displace a competitor in order to gain market share."
But Rasmus said his company won't do that by cutting prices, because those gains are "ephemeral." Hi-Crush has turned down business for price reasons, he continued. "We aren't going to change or go after price. We've seen competitors bid jobs on pricing that we know for a fact is below their cost of production. That is unsustainable." Instead, this executive said, Hi-Crush will seek to defend its sand business by offering superior value to customers.
Joel Schneyer, a managing director at investment bank Capstone Headwaters (Boston, Massachusetts), told Industrial Info, "The road ahead doesn't look good. I expect some mines will be shut down temporarily, and then restarted when market conditions are more favorable. The cost of restarting a shuttered sand mind is very little, maybe $5 million or $6 million. The overbuild has capped upside for a really long time. That puts a cap on future profits."
Using publicly available financial data, Schneyer documented sharply declining adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for sand companies, particularly since early 2018, when the frac sand bonanza in the Permian Basin really began.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
"This has been brewing for some time," said Joseph Govreau, Industrial Info's vice president of research for the Metals & Minerals industry. "The current market situation puts in jeopardy more than $800 million in frac sand mine and transloading projects that IIR is tracking in North America."
Since the start of 2017, 39 frac sand projects valued at about $2 billion have been completed, according to Industrial Info's Global Market Intelligence (GMI) Platform. Twenty-six of those 39 projects, valued at about $1.7 billion, are located in Texas. They were built to serve burgeoning local demand from Oil & Gas operators in the Permian and Eagle Ford shales of Texas. Local sand facilities in Texas were seen as a lower-cost alternative to transporting sand from the Upper Midwest. For more on the shifting dynamics of the frac sand market, see September 19, 2017, article - Economics of Fracking in Texas May Shift with Planned Frac Sand Projects and October 1, 2018, article - Is the Frac Sand Gold Rush Over?
But developers have cancelled or placed on hold 17 proposed sand projects valued at about $881 million. These projects were scheduled to begin construction between January 2017 and December 2020. Eight projects scheduled to be constructed in Wisconsin have been cancelled or delayed; the aggregate value of those projects was about $510 million. Texas has the second-most number of cancellations or delays, with five, followed by Utah, Arkansas, Ohio and Missouri, with one proposed project each.
Over the last two years, 19 frac sand facilities have been closed or shuttered. Most of these projects (14) are located in Texas, according to Industrial Info's GMI Platform.
The carnage in the sector is evident in the plummeting stock prices of leading publicly traded companies like U.S. Silica Holdings Incorporated (NYSE:SCLA) (Katy, Texas), Covia Holdings Corporation (NYSE:CVIA) (Independence, Ohio), Hi-Crush Incorporated (NYSE:HCR) (Houston, Texas), and Sand Smart Incorporated (NASDAQ:SND) (The Woodlands, Texas). All of those stocks have fallen between 78% and 94% since the start of 2017.
A sample of comments from frac sand company executives on third-quarter earnings calls confirms the industry dynamics and sketches a future of additional production cutbacks, facility idlings and price cuts.
Several executives said their companies had removed supply from the market, and predicted further withdrawals.
On October 29, U.S. Silica Holdings Chief Executive Officer Bryan Shinn said: "Over the past few months, we've taken approximately 5 million tons of Northern White and regional sand capacity off-line through a combination of reducing hours worked, or completely idling plants... My expectation is that we'll see another 10 million to 15 million tons come off-line (across the industry)." He said he expected more mine closures over the next few quarters. Northern White sand comes from the upper Midwest region, chiefly Wisconsin and Minnesota.
On a November 6 call with investors and analysts, Bob Rasmus, chief executive of Hi-Crush Incorporated, said: "The non-cash impairments, which we recorded during the quarter ... reflect the reality that the industry is undergoing a drastic change. The market is over-supplied and will be rationalized; whether through attrition and/or consolidation. We are seeing it happening in the form of mine closures, idling and curtailed hours of operation... We believe there will be additional supply taken off the market over the next several months as higher-cost production is removed."
"Despite the supply rationalization that we've seen to-date," Rasmus continued, "oversupply persists which led to increased pricing pressure in the back half of the quarter ahead of what was originally expected... Against that backdrop, we've seen probably four or five plants in the Permian itself that have been idled, come offline or substantially reduced hours of operations... I think that the Permian, overall, in terms of capacity, is oversupplied by about 15 to 20 million tons that still needs to come offline in that. In the Northern White sector, we've seen additional supply come offline, additional idlings, and I still think that there's probably 10 or 15 million tons ...that needs to come offline in Northern White" capacity.
Turning to demand for frac sand, U.S. Silica Holdings' Shinn said: "For (the) oil and gas (market), we expect industry frac sand volumes pumped in Q4 to be down at least 10% sequentially due to the expected seasonal slowdown. Pricing will be under further downward pressure... Northern White sand held up pretty well. It was only down about 6% sequentially in Q3."
"Many people have written (about) the demise of Northern White sand," Shinn commented, "but it's still holding up pretty well in the market. Believe it or not, we hit a new Northern White sand volume record sold in July. And we saw a pretty robust demand before things cooled off in the back half of Q3." On the subject of prices, this executive said he expected "more pressure for sure. It was down about 15% sequentially. That trend is really making it difficult on some of these new mines and new operators that have come into the industry."
Rick Navarre, chief executive of another sand company, Covia Holdings, said on November 6: "Customer budget exhaustion has led to sharp decline in demand, and this is expected to continue in the fourth quarter. Looking further into 2020, longer-term visibility remains challenged. However, most of our customers expect activity to bounce back in the first quarter as budgets refresh."
Navarre continued: "It is our view that pricing has fallen well below the level of all-in cash production costs for many proppant producers, particularly when factoring in SG&A (selling, general and administrative expenses), maintenance and capital spending. This cannot continue indefinitely and has resulted in reduced economical production capacity. We expect this trend to continue in the near term in most basins, particularly in the Permian, which has the greatest supply-and-demand imbalance... We see the fourth quarter this year being more challenging than what we saw last year from a pricing perspective. Volumes will be lower than what they were in the fourth quarter of last year as well."
Hi-Crush's Rasmus said he expected "continuing headwinds for the remainder of 2019...Everybody anticipates Q4 to be slow, and I think that there's not going to be any new market share in 2020... And that's our strategy is to displace a competitor in order to gain market share."
But Rasmus said his company won't do that by cutting prices, because those gains are "ephemeral." Hi-Crush has turned down business for price reasons, he continued. "We aren't going to change or go after price. We've seen competitors bid jobs on pricing that we know for a fact is below their cost of production. That is unsustainable." Instead, this executive said, Hi-Crush will seek to defend its sand business by offering superior value to customers.
Joel Schneyer, a managing director at investment bank Capstone Headwaters (Boston, Massachusetts), told Industrial Info, "The road ahead doesn't look good. I expect some mines will be shut down temporarily, and then restarted when market conditions are more favorable. The cost of restarting a shuttered sand mind is very little, maybe $5 million or $6 million. The overbuild has capped upside for a really long time. That puts a cap on future profits."
Using publicly available financial data, Schneyer documented sharply declining adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for sand companies, particularly since early 2018, when the frac sand bonanza in the Permian Basin really began.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
