Summary- Select Sands expands its business to Utica and Marcellus.
- Recent frac sand earnings imply rising prices and logistics problems.
- Select Sands' earnings are pre-market Monday.
Select Sands (V:SNS) announced on Wednesday that it completed its first sale of 10,000 tons on its Tier 1 frac sand by barge to drillers in the Utica and Marcellus shale regions. This is a significant achievement for the firm as it represents its first foray into shipping by barge.
But what it also points to is further confirmation that the frac sand market recovery is in full swing. And, while Select Sands is still a small player in this field the future outlook for the company is bright.
Earlier this earnings season both Hi-Crush Partners (NYSE:HCLP) and Emerge Energy Services (NYSE:EMES) reported banner earnings and sales for Q3. Hi-Crush, in particular, showed off impressive top- and bottom-line revenue growth as both sales volume increased both sequentially and year-over-year and average selling prices increased.
In 2017 Hi-Crush reported an $8/ton increase in average selling price from $60 to $68 per ton. This is a clear example that the fracking boom currently underway is not abating, even though rig counts have plateaued.
While Hi-Crush failed to meet market expectations, that’s not a commentary on the industry itself but rather a reflection of both management and the sell-side.
Logistics, Logistics, Logistics
Emerge Energy beat expectations with both a 6% increase in volume and a better than $5/ton increase in ASP. However, it cited the real problem emerging in this space, reliable railway access. Rick Shearer, Emerge Energy’s CEO, highlighted this on the earnings call:
We have worked closely with our Class 1 railroad partners to help improve order and traffic flow. And although, we are not ultimately where we want to be, we did make some progress during the third quarter.
Our team worked creatively in Q3 to locate another shipping point option in the Wisconsin area to allow flexibility when direct service was limited. We continue to look for creative options in an effort to optimize our supply chain services and maximize shipments during the current peak demand.
This plays right into the problems that Select Sands will face as it builds out its logistics platform. We will get more clarity on this during the earnings call for Q3 which is scheduled for Monday, November 13. I intend to be on that call.
For Select Sands, 2017 is the year of entering production and building the relationships necessary to deliver sand to its prospective customers. To alleviate first-mile issues, the company just entered into an option agreement to purchase another 223-acre property in Arkansas to house and manage its railway logistics.
According to the company’s press release, the property, located in Newark, Arkansas, would greatly improve its rail-car loading capacity. If it exercises the option, this would be a $1.6 million purchase.
This would be the site for a new build processing and loading facility. At this point the firm owns a small facility it bought for pennies which allows it a capacity of 500,000 tonnes per year. The plan for the Newark property, or some other one if its search reveals one, would be to increase capacity to 3 million tonnes of frac sand produced and delivered per year.
Location, Location, Location
The main investment thesis for Select Sands over that of other major Tier 1 producers is that the firm has the biggest and closest deposits of the highly-demanded 70-100 mesh “Ottawa White” frac sand in the U.S.
All the other producers are mining Tier 1 out of the Wisconsin/Minnesota region and are now trying to make up the volume demanded by drillers with in-basin lower-quality sand. Emerge addressed this in its earnings report citing that:
Although many operators have publicly announced they are comfortable with the lower-quality, lower-priced in-basin sand, we have proved through our recently signed take-or-pay contracts that a large segment of the customer base still demands Northern White. As a leading Tier 1 sand provider, our Emerge Energy is able to offer whichever product the customer prefers. [emphasis mine]
At this point Select Sands is not enough of a volume producer of Tier 1 sand to materially affect this market, but the fundamentals of it are strong and with its significantly lower potential logistics costs it still has a tremendous potential to upset the market.
Shipping costs are the major hurdle in delivering sand, and being hundreds of miles closer to all of the major plays in Texas, Louisiana and Colorado means the ability to offer Tier 1 sand at prices closer to in-basin "brown sand."
And now with the market telling it it’s possible to ship sand by barge to the Northeast and, presumably, down the Mississippi, we’re seeing the real-world effect of being centrally-located.
Bottom Line
The stock bolted higher on strong volume earlier this week, jumping from C$0.45 to a high of C$0.69. A quick read of the chart tells you that this move if sustained is likely the beginning of a new major uptrend. The key to that will be an earnings report on Monday that shows concrete growth rather than more foundational moves.
The market wants to see this company shipping sand in increasing volumes. And if that occurs on Monday, then current shareholders are looking at a very nice bonus coming into year end. I’m a buyer today on low-volume weakness to end this week. Earnings will be before the market opens on Monday.
I’ve been watching Select Sands since it was La Ronge Gold and making this shift from a speculative gold player in Saskatchewan to a frac sand producer in Arkansas. And I continue to follow it closely as both an analyst and a shareholder.
Disclosure:I am/we are long SLSDF.
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