A rapid increase in sand mining capacity collides with softening demand.
A surge in regional sands displaces traditional Northern white sand.
Remember the record year for energy industry IPOs in 2013? Sand miners accounted for three of the top 10 energy firms in equity value appreciation following public market debuts. This included all new energy IPOs engaged in oilfield services, midstream and the E&P sector.
But times change. A basket of publicly held sand mining companies saw equity valuations decline 51% in 2018, the largest drop among all oilfield service groups—including the decimated offshore drillers.
Wall Street carnage illustrates how sand miners are facing a structurally oversupplied market in 2019. The major tight formation basins, plus Canada, consumed between 85 MMtons and 95 MMtons of sand last year. Completions—and sand consumption—peaked mid-2018 before fading after Labor Day.
Then it got worse. Mining utilization fell from 80% of capacity in 2017 to 50% by year-end 2018. Pricing per ton of sand dissipated like dust in the wind, reaching the low $20 per ton range with some spot market regional sand being sold in the high teens as 2019 got underway. Pricing for some grades of sand declined 40% over a fourmonth period.
Sand miners responded by shutting in mining capacity (mostly Northern white sand) with estimates suggesting 30 MMtons idled in a market featuring 175 MMtons of capacity. Aggregate industry sand consumption rose 16% in 2018. It was only expected to rise 5% this year as demand forecasting became a precarious undertaking with West Texas Intermediate parked below $50.
As of Jan. 4, a loose consensus projects 2019 sand consumption to increase to 127 MMtons. Getting there requires an asterisk. The number reflects an average of five major financial firms or industry analysts with the highest at 154 MMtons. This 127-MMton consensus stands in stark contrast to projections from the nation’s largest and most diversified sand supplier, which argues industry headwinds will keep this year’s oilfield consumption flat at 100 MMtons.
Whatever the number, sand supply is accelerating faster than demand as the market witnesses a production landslide from new regional mines. The Permian is at the fore with 65 MMtons of new capacity coming online by mid-2019 versus 30 MMtons of demand. Elsewhere, the Eagle Ford is balanced at 22 MMtons, while new regional mines in the Midcontinent will add 16 MMtons of supply to a market with 7 MMtons of demand.
The good news is sand consumption per well is still rising as slick water and finer proppant grow to dominate well completion techniques. However, the rate of increase per well is slowing as E&P companies bump into diminishing returns. The economic sweet spot for slick water varies between 1,800 lb/ft and 2,500 lb/ft of lateral. Several basins display two distinct profiles with leading-edge sand use above 2,000 lb/ft of lateral and a lower cluster at 1,200 lb to 1,500 lb per lateral foot. The lower cluster is edging toward the upper cluster as more E&P companies adopt similar completion techniques, a process favored by the reduction in sand pricing, which represents up to 15% of well cost.
Simultaneously, inexpensive regional sands are crowding out premium Northern white sand as E&P companies opt for lower well costs that generate similar IP rates, even if data show rapid production declines consuming any initial cost advantage for regional sand through proppant degradation and lower ultimate recovery.
Meanwhile, drilled but uncompleted wells imply a six-month completion backlog and 50 MMtons of potential consumption. It could be a bright spot for sand miners who await stability in outlook from reconfigured 2019 E&P budgets.