Victory Nickel Inc. announced that frac sand sales during the first quarter of 2015 have been slower than anticipated. Sales decreased monthly from January to March and, as a result of current market conditions the company has temporarily suspended production at its Seven Persons, Alberta, Canada, frac sand plant (7P). The 7P Plant was just entering its full production stage following the start-up period towards the end of 2014.
"Given the unusual market uncertainty and longer than expected spring break-up conditions, suspending frac sand production temporarily was a prudent business decision, and one that was in the best interest of our shareholders," said Rene Galipeau, vice chairman and chief executive officer of Victory Nickel Inc. "We will continue to monitor the situation and re-start production as soon as possible. In addition, we're pleased to note that a creditor is being supportive by continuing to extend loan repayment terms."
Sales for the first quarter were 9,327 tons, compared with 44,529 tons during ramp up in the fourth quarter of 2014. Frac sand sales typically slow down during this period of the year due to spring break-up road restrictions in Alberta. This year, spring break-up is more pronounced than in prior years as the majority of the oil and gas exploration and production (E&P) companies appear to be trying to conserve capital by postponing drilling activity to less costly periods after spring break-up.
With the price of oil dropping by approximately 50 percent since November 2014, E&P companies are reducing capital expenditure programs and, as a result, drilling activity has also slowed. The slowdown, combined with spring break-up is placing pressure on Victory Nickel's oilfield service company customers to reduce E&P company drilling costs. These companies, in turn, look to their suppliers, including frac sand producers, to help lower their costs.
As a result of market uncertainty in Canada and the United States, a "knee jerk" reaction by predominantly the U.S.-based frac sand retailers caused import frac sand prices in Canada to be reduced to levels that do not appear to be sustainable over the long term.
The company has built approximately 40,000 tons of finished product and raw material inventory at its 7P Plant which is available to supply its customers as fracking activity resumes following spring break-up, according to the company.