Frac Sand Market Exploding; For Investors, There’s Much More
Rainmaker Begins Field Work on 24k hectare Peace River Property
Investors need look no further for evidence of the growth potential of the frac sand market than statistics from CN Rail. More than 50,000 carloads of the mineral were shipped in 2013, up 500% in five years. And as the LNG buildout commences, that number will undoubtedly increase markedly. The growth will likely come from new domestic sources, given the cost of transport from traditional Mid Western US markets, which can reach $300 a tonne to the wellhead and can take weeks to get to Canadian drillers. An average well uses 1-5 million pounds of sand or the equivalent of 25 railcars.
Hydraulic fracturing is the method used to intersect and open existing natural fractures or create new fractures in a shale gas reservoir. By pumping fluid with a suspended "proppant" – usually "Frac Sand" – down a wellbore at a high rate and pressure, the surrounding rock will fracture and crack. The liquid is then pumped out but the "proppant" will remain to fill the fractures and keeps them open in order for the gas to be extracted.
"The key to our strategy is to produce quality sand in close proximity to established infrastructure and our customers," stated Rick Patmore, President and CEO of Rainmaker Resources (RMG: TSXV) in an exclusive interview with Financial Press. "Our approach is to acquire properties with potential for a minimum million tonnes of sand per year, bring them into production quickly to generate significant and growing cash flow while being amongst the lowest cost producers."
Growth in the space has been impressive, particularly in the US.
-
US Silica Holdings (SLCA: NYSE) was trading at $10 a share in mid 2012. Today it is $51.30
-
Hi-Crush Partners (HCLP: NYSE) was trading at $15 a share in late 2012. Today it is $49.25
-
Emerge Energy Services (EMES: NYSE) was trading at $17 a share in mid 2012. Today it is $102.00
US Silica IPO'd in 2011 at $200 million. Market cap today is $2.8 billion.
Two major investment drivers for Rainmaker are that currently 90% of frac sand used in the oil and gas industry (total 3.5 million tonnes a year) comes mainly from the US Midwest. Also, the shale gas industry in Western Canada is still in its early days, with plenty of room for growth. Frac sand is necessary to wring as much oil and gas possible out of tight shale formations. While there is controversy regarding the process the burgeoning growth will likely only increase.
Rainmaker has moved quickly to position itself as a major player in the space, securing two properties in western Canada and is on the hunt for more on both sides of the 49th. Given the provenance of management, it likely won't take long for production and cashflow to commence.
Recent announcements by Encana in their Montney Swan field (dry gas) and EOG Resources in the US (tight oil) have both announced successes in improved production, reserves and economics for their wells by putting more proppant into their wells in a highly effective manner. There are a number of other successes and general trends like the Marcellus in the northeastern US where the number of stages/fracs in wells has trended to increase.
Some frac sand analysts have two market demand projections, before and including the EOG factor, the increased demand could be that significant. This does not address the ‘workover' market; the process of going back into wells and improving their efficiency and recovery by re-stimulating them. The Barnett area in Texas is the oldest of the unconventional horizontal fields in the US and is seeing a trend in working over the wells using today's technology, with good success.
Rainmaker CFO and Director Alan Young states: " These examples are the tip of the iceberg and others are going to (or already have) followed suit and will be evaluating the investment in their wells which in almost all cases includes more proppant."
As the market value for gas continues to stabilize at a higher level than past years, more companies are revisiting their gas plays and will follow the example of Encana and invest in more proppant for their wells.