A strong frac sand market faces lower oil and natural gas prices

The producer price index for frac sand rose 1% in October, following a 1% gain in September, according to an index created by Cowen & Co. 

At the end of October, it was at its highest level since the end of 2012.

The overall decline in the price of oil and, until recently, a natural gas price stuck below $4/Mcf, is going to provide the frac sand market with a significant test. That conclusion is reached after reading an extensive study on the frac sand market published by Moody’s late last month.

It’s bullish in almost every way. “Sand demand is outpacing supply,” the report said. “Coarse grades of Northern White sand still remain the premium, most sought-after products. Tightening demand is leading to price increases and other grades/types of sand are being used to fill the gap.”

But there’s one ominous sentence: “If oil prices remain below $80 per barrel, drilling and oilfield services companies will be pressured as E&P companies reduce their capital spending and their demand for services,” the report said. “This pressure could result in reduced proppant volumes.” (Proppant is the formal term for frac sand.)

It’s a mixed message so far on capex spending into 2015. ConocoPhillips said its spending will be reduced; ExxonMobil’s three-year program calls for 2015 spending not far from 2014 levels, but still down from 2013. Other companies haven’t come out with a firm number on their estimated spending, but are hinting at cuts, given the price environment.

One other notable aspect of the proppant market Moody’s cites is the increasing length of term contracts. Those contracts are longer and for more volume, sometimes as much as four times the amount of sand as previous contracts. But again, there’s a cautionary note: “(W)e remain cautious on the will of frac sand producers to enforce contracts if drilling activity retreats.”

One stunning number: 80% of the cost of delivered sand is the cost of transporting it. That could be a key issue, Moody’s writes.

The growing backlog on the nation’s railroads has been getting increasing attention. Yes, there are fewer cars carrying coal from several years ago, but coal carloads are still up year-on-year; petroleum deliveries are up significantly, but are still relatively small compared to coal shipments; and total traffic is up more than 3% year-on-year.

That has the risk of hitting sand deliveries. “With the recent shift in frac sand demand, rail service and railcar demand has also increased significantly and, in 2014, rail congestion impacted cycle turns negatively for the rated proppant companies,” the report said.


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