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Headwaters Report Predicts Long-Term Proppant Growth

Headwaters MB released its mid-year 2015 Oilfield Services Outlook. The report notes that 2015 has thus far been a retrenchment year, with the number of land-based drilling rigs dropping by approximately 50 percent since November 2014 and companies in the oil services sector reacting to the new oil price deck reality.

In the proppant section, the report states that while increased demand for proppants over the last several years was driven by the growth in hydraulic fracturing, concurrent with the drop in oil prices, proppant demand is projected to drop from 110.1 billion lb. (55.1 million tons) consumed in 2014 to 79.6 billion lb. (39.8 million tons) in 2015. Those basins forecast to be affected most are the Eagle Ford and the Bakken, the Permian and Marcellus forecast to be least affected.

In 2014, 91.7 percent of the proppant mass consumed (101.0 billion lb.) was sand, which represents 65 percent capacity utilization based on current estimates of 85 million tons of sand currently available. Note that 66 percent of the available sand capacity is held by the top 10 sand suppliers. Unimin, holding the largest market share of capacity represents 12.6 percent of the total market, while U.S. Silica has recently surpassed Fairmount Santrol to represent 11.0 percent of the total market.

Private equity continues to have a high interest as investors and drivers in the frac sand space. Of the top 10 sand suppliers, six of these have ties to private equity (Chieftain, Hi-Crush, Preferred, Superior, Fairmount Santrol, U.S. Silica). E&P companies, in partnership with oilfield service companies, continue to refine their well design and hydraulic fracturing techniques to maximize hydrocarbon recovery from each well.

These techniques vary based on formation and well geology, but some of the more pervasive recent trends include longer lateral drilling lengths coupled with an increased number of hydraulic fracturing stages per well. E&P and oilfield service companies have also been increasing the amount of proppant used per frac stage and, together, these techniques have greatly increased the volume of proppant used in the completion of each well, which we expect will positively impact sand volumes sold.

Coupled with pad drilling (and closer well spacing) and the potential refracking of old wells, proppant demand is expected to increase over the long term. Smaller grained sand is also increasing in use, with 40/70 and 100 mesh product increasingly mined, particularly from Missouri and Arkansas which is closer to the Eagle Ford and Permian end markets and has a delivered cost advantage to Texas over Wisconsin and Minnesota sourced sand.

While the long term looks promising, in the near term frac sand miners are feeling the pinch. Spot sand is currently selling for $35 to $40 per ton FOB Wisconsin, down from $50 to $60 per ton less than a year ago. EBITDA margins continue to drop, we estimate average EBITDA per ton of sand sold for Q2 2015 to be in the $20 per ton range.

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