HOUSTON – An early bet on hydraulic fracturing turned U.S. Silica’s sleepy sand mining business into one that’s growing more like a tech startup than an industrial supplier.
The Maryland miner, a $2.2 billion public company that six years ago was bought by a fixer-upper investment shop for $300 million, digs up white sand from Wisconsin and Minnesota used in mortar and grout, automobile parts, iPhone Gorilla Glass and even toothpaste. Its sand is also one of the ingredients in the mixture of water and chemicals that oil companies use to break open shale rock.
The oil industry’s appetite for sand is growing, but it’s also changing, requiring on-the-spot deliveries of sand to frac sites through networks of rail cars and storage silos. That means the need for speed, scale and financial muscle to handle logistics could spur a wave of mergers and acquisitions among frac sand providers in future years, said Michael Lawson, director of investor relations for U.S. Silica, in a recent interview with Fuelfix.
“We are looking to be a consolidator,” Lawson said. “We have an active pipeline of things we’re looking at.”
Lately, oil companies have figured out they can dramatically boost their oil well output by increasing their dosages of sand from 2,500 tons to 5,000 or 10,000 tons for every frac job, and U.S. Silica projects the U.S. market for frac sand will grow 30 percent this year alone.
It competes with a handful of U.S. sand miners like $1.7 billion Emerge Energy Services, $1.6 billion Fairmount Santrol and the $1.5 billion Hi-Crush Partners, as well as two large private equity-backed firms. U.S. Silica and its three publicly traded rivals all saw Wall Street debuts in the past two years.
A burst of horizontal drilling in West Texas has eased a supply glut in fracturing pumps, and that has started to change sand buying patterns in U.S. shale basins, as pressure pumpers move from contracts to faster, more competitive spot work. Pressure pumpers from Halliburton to C&J Energy Services can no longer wait weeks for sand to arrive in smaller trucks loads: they’re buying more sand that’s moved from mines by train and stored at the oil patch.
“At the beginning of 2012 we were sending about 5 percent of our oil and gas (sand) volumes out in the basin through train loads and terminals,” Lawson said. “Now we’re selling 70 percent of our oil and gas volumes out in the basin. So you need to have the balance sheet so you can do that. The small guys don’t have that.”
Frac sand providers need to have access to multiple railroads because customers want flexibility, and the capability to send sand to the Marcellus Shale in Pennsylvania one day and the next to the Eagle Ford Shale or the Permian Basin in Texas. U.S. Silica, he said, has about 7,000 rail cars, and it snapped up a small frac sand provider, Voca, Texas-based Cadre Services, for about $98 million earlier this year.
“I expect at some point we’re going to see consolidation in the industry,” he said. “I mean, in today’s market, people have stars in their eyes because the frac sand market is red hot, and everyone wants profits for not only this year but for the next 10 years. In a couple of years you could see a blockbuster, maybe two of the big six merging together.”