Morgan Stanley just got really bullish on sand
'Big Sand' is consolidating and is about to get bigger.
Shale companies aren’t the only ones that suffered during oil’s plummet to $26 per barrel.
As the oil rig count fell 54% over the past year, the outlook for the sand industry—a key ingredient in fracking—dropped alongside it. But as this multi-billion dollar industry consolidates, there is a silver lining for sand miners, according to analysts at Morgan Stanley.
Sand intensity per well is trending higher, and many rig operators “have not found the upper limit of how much sand is too much—in terms of both physical and economical limits,” write Morgan Stanley analysts Ole Slorer and Connor Lynagh. Sand pumped per well increased over 20% in 2015, and it could rise another 15% this year, they note.
Shale production per rig has soared over the past year, lowering breakeven costs for US producers and brightening the outlook for sand miners. The technological advancements have caused a decoupling between rig counts and total production.
The largest US shale oil fields, including the Permian Basin, Eagle Ford and Bakken regions, have mostly maintained production as rig counts dropped sharply.
Given the higher production per rig, Slorer and Lynagh expect oil well completions to increase in 2017. With the increasing completion rate coupled with higher sand use per well, they see sand demand rising 70%-80% by 2018.
Accordingly, Morgan Stanley is bullish on sand mining companies, placing overweight ratings on both US Silica Holdings (SLCA) and Fairmount Santrol Holdings (FMSA).
"We see FMSA and SLCA continuing to grow volumes from what we forecast to be a mid-2016 trough. We forecast that overall sand market volumes will grow ~70%/80% in 2017/18, while we assume FMSA's/SLCA's volumes grow somewhat less as higher-cost capacity is reactivated and takes some share (but increases industry pricing)."
Overall, Morgan Stanley expects sand prices to increase at least 30-35% by the end of 2018, and this will "[incentivize] further mine build-out, which we expect to be dominated by the largest, lowest-cost players in the industry."
