Sand-intensive drilling techniques are driving up the amount of proppant used per well, but not enough to lift proppant companies out of industrywide economic doldrums.

Negative outlooks for E&P and oilfield service companies (OFS), driven by lower oil prices, are expected to trickle down to proppant companies, resulting in a projected EBITA decline of between 10% and 20%, Moody’s Investors Service said April 23 in a report.

“Drilling companies are cutting expenses to maintain profitability, and in turn more proppant companies are trying to reduce cost inefficiencies in their customers’ and their own supply chains,” Moody’s Vice President Karen Nickerson said.

The desire to maintain market share in the long run and avoid losing business when the market recovers likely means proppant companies will not force customers to live up to their contracts. This could put potential profit further at risk as proppant demand declines.

Adding to the weak outlook is a growing number of uncompleted wells as drillers hold off bringing more oil into an already saturated market with unmatched demand.

“Even with proppant companies driving down costs and increasing well usage, it won’t be enough to offset the dropping rig count and a buildup in uncompleted wells,” added Nickerson. “We expect to see proppant companies’ leverage increase throughout 2015 as their profit margins narrow.”

Moody’s thinks proppant suppliers, particularly the larger ones, will pursue negotiated contract lengths and proppant volumes.

Uncertainty: The bleak forecast comes despite operators’ proppant loading ramp-up, aimed at increasing lateral lengths. Hart Energy Market Intelligence Series research revealed in April that sand usage was up. In some instances, as much as 15 million pounds of sand were being pumped down a single extended lateral. It is unknown how much proppant could be used this year, Moody’s said, but “it is clear volume will decline” given market conditions.

Survival: Moody’s predicts oil prices will gradually rebound later this year and demand will increase, but “supply will continue to outpace demand, keeping OFS markets and proppant demand weak at least through mid-2016.” To get through this downcycle, proppant companies are turning to operational efficiency, lowering costs and maintaining liquidity. They are also adding capacity at lower-cost facilities and properly aligning inventory to best serve customers’ needs. Focus in 2015, according to Moody’s, will center on logistics and product solution investment, but plans for additional sand capacity face delays.

Recovery: When prices rebound and drillers return to unfinished business by completing oil wells, proppant companies need to be ready. “Proppant demand could recover more quickly than in past cycles even without a corresponding increase in rig count due to the potential backlog of drilled but uncompleted wells,” Moody’s said in the report.

In the meantime, companies can still position themselves to thrive, despite moves by some OFS companies to consolidate proppant vendors. Opportunities to gain market share exist.

“Logistically advantaged proppant companies that provide timely and reliable delivery of a broad selection of proppant products are in the strongest position to gain market share,” Moody’s said, noting the caveat is conceding on price. “As 2015 progresses, we believe these companies will not be able to pick up enough volume, especially given the uncompleted well builds, to offset profit-margin deterioration. The second half of 2015 should begin to reveal who the winners in proppants will be.”

Contact the author, Velda Addison, at vaddison@hartenergy.com.