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Frac Sand Industry Facing Headwinds

Joel Schneyer, managing director at Capstone Headwaters, wrote on LinkedIn that the frac sand industry is facing continued headwinds with too much installed capacity and a shale drilling slowdown.

He quoted several producers, including:

U.S. Silica Holdings – “...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…And when I look at the cash losses that are piling up for some of these competitors, I just don't see how they continue to operate. And quite frankly, even before we saw some of the decline in completions demand in the back half of Q3 and we're seeing it obviously into Q4 here, even before that, many of them were operating at a cash loss for a variety of reasons…So I feel like there is capacity that has to come out there in West Texas. My expectation is that we'll see another 10 million to 15 million tons come off-line. By our math, it's already 7 mines that are closed and I think there's more to come over the next couple of quarters here.”

Covia – “For the past several weeks, we've noticed an increasing amount of reported local supply in the Permian coming offline, either through plant de-ratings or complete shutdowns. As suppliers have exited the market, we have received increasing interest from customers looking to procure sand from a reliable source.”

Hi-Crush Inc. – “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've seen these actions continually across the industry in the third quarter. 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, 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 would expect that the increase by at least two or three more plants. 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. The Northern White sector, we've seen additional supply come offline, additional idling's and I still think that there's probably 10 or 15 million tons before some of today's announcement that needs to come offline in Northern White.”

Source Energy Services – “And what we saw in the quarter is one of our competitors in the U.S. pulled out of the Canadian market, so we're able to gain some market share there. And a couple of the – other people who normally move sand into Canada in small amounts did less of that. So we were able, basically, step into those – into that freight and basically push up our percentages. Even though the gross dollars wasn't bigger as a percentage of the Canadian sand market, grew to a small extent…As far as domestic sand … you can hear a lot of news about it or noise about it, but the reality is a lot of the domestic sand in Canada is not competitive and in parts of the basin where we operate. So it's very much a basin that is going to, in the long-term, be split between Northern White sand and domestic sand …The reality though is for today's frac, you need a couple of things. One, you need large in-basin storage and second, you need logistics capabilities. So to date, most of U.S. players that have tried to stick to their toe into the Canadian waters, they haven't done particularly well. They can move sand in as a commodity and they get small margin of that commodity from time to time, but they don't move it in and provide a full-service offering to their customer, and that's how we always try to differentiate ourselves.”

Read the entire article here.