US frac sand companies are very expensive
Is it Time to Sell High Valuation US Frac Sand Companies?
Victory Mountain Provides High Quality Canadian Alternative
No matter what side you might be on the use of fracking technology, it has become apparent that extracting up to 40% more oil and gas from a well is worth the debate. And as investors familiar with the sector will note, the three companies in the US that are at the forefront have seen their share prices double and triple over the last year.
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 "Fracking 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 shale gas industry in Western Canada is in its infancy, stated Patrick Morris, Director of Victory Mountain (VMV: TSXV). "The Company is taking initial steps to become one of the first publicly traded Canadian companies to become a major supplier of frac sand. Currently, 90% of the frac sand used in Canada's oil and gas industry (3.5 million tons per year) comes from the Midwestern US and is very expensive. We believe that there is a strong economic future in cost-effective domestic frac sand production both for the shale industry and for our shareholders."
While the frac sand industry is more mature in the US, the three main suppliers have seen stunning returns over the last year:
- US Silica Holdings (SLCA: NYSE) was trading at $10 a share in mid 2012. Today it is $36.50
- Hi-Crush Partners (HCLP: NYSE) was trading at $15 a share in late 2012. Today it is $40
- Emerge Energy Services (EMES: NYSE) was trading at $17 a share in mid 2012. Today it is $56.00
Trailing P/E's are 26,15 and 64 times respectively.
To get US proppant to the well-head can take days or weeks and courtesy of the economic structure, ends up costing about $400 a ton once all the middlemen take a piece. And one well may need up to 4,000 tons. The math is compelling.
That said VMV's plan is to deliver frac sand at a significantly lower cost because the properties are near Fort McMurray Alberta, and are right in the shale sweet spot of the massive western Canadian basins, including the prolific Bakken area. Delivery to the wellhead can be measured in days or even hours.
The demand for US frac sand has tripled from 10 million tonnes in 2009 to north of 30 million in 2013. And there is little evidence that demand will slow anytime soon.
VMV recently announced the acquisition of 8 Metallic and Industrial Minerals Permits totaling approximately 737 square kilometers (73,728 hectares), located west of Fort McKay in the prolific Fort McMurray area of northeastern Alberta.
The Pelican Formation is known to crop out or underlie the Property as identified in preliminary work. Preliminary review of extensive oil and gas well drilling in the Property area has outlined Pelican sand thicknesses of up to 50 plus metres, which will be the focus of exploration. The sand is near to and in some areas exposed at surface, which will facilitate affordable exploration costs and upcoming operational logistics.
The property is served by a network of all-weather roads serving the oil and gas industry. Approximately 95 km of all-weather roads link the property to Fort McMurray and an active rail line.
Consulting Geologist Mike Dufresne commented: "Future evaluation of the frac sand potential of the Property is warranted given: the proximity of several Steam-Assisted Gravity Drainage operations in the Property area; the developing infrastructure associated with oil sands growth adjacent to and on the Property; and an increasing number of light oil and gas plays in Alberta and neighboring provinces/territories."
The Bottom Line
VMV's metrics are compelling: potential lower shipping costs and potential quick cash flow. The properties are close to end-users, infrastructure and plan to be one of the first to market companies in Canada. At the moment there is only one producer in Alberta, Canadian Silica Industries.
The Company is in the process of arranging a non-brokered private placement for proceeds of $500k. The funds will be used to exploration expenditures to further enhance shareholder value and for other general corporate purposes.
This dynamic opportunity is both a play on the growth of shale gas and oil production as well as direct exposure to a significant growth market.
Victory Mountain trades at $0.07.