Frac sand is all about location. Location-Location-Location.
And Select Sands (SNS-TSXv) has
a superb location for its new Tier 1 frac sand deposit in
Arkansas—almost right over top of the Fayatteville Shale, and 650 rail
miles closer to Texas than Wisconsin, where almost all the other Tier 1
sand is produced in North America.
Even before he is in production, CEO
Rasool Mohammad says his phone is ringing constantly as both energy
producers and OilField Services (OFS) companies are calling to ask about
his new deposit—called Sandtown. He has literally been offered
contracts before he can deliver any product.
That’s how desperate the Market is for high quality Tier 1 frac sand
close to Texas. Frac sand is the #1 reason well productivity continues
to increase in North America.
In August 2013 Whiting and EOG experimented with using short wide
fracks—and basically doubling the amount of sand per well—instead of
long skinny fracks. This new method increased production dramatically
then, and producers are still—almost two years later—increasing the
amount of sand they use per well. Frac sand is the last place oil and
gas companies want to cut spending.
Select Sands (SNS-TSXv) gives a great opportunity to patient investors who like groundfloor investments. There are LOTS of catalysts near-to-medium term.
This is a stock with only 42 million shares out and trades at 35 cents.
So far, Mohammad has proven up the quality and size of the Sandtown
deposit with over a dozen drill holes. The deposit is sitting right at
surface in many places, and goes down over 100 feet, giving it lots of
size. For the geologists, the deposit is in the St. Peter Sandstone
formation, which is the same as the Tier 1 “White Sand” that comes from
Wisconsin.
The Sandtown sand has been tested by Stim-Lab, one of the best and
well-known companies in the business and results of the two main sizes
of frac sand-- 40/70 and 100 mesh—met or exceeded the Tier 1 frac sand
specs.
(In fact, the sand was such high quality it could be high-graded and
used for a lot of industrial uses, like making glass. Several frac sand
suppliers sell as much as half their product to the glass industry.
Low energy costs in the US are bringing back a lot of glass industry;
but that’s another story.)
So Select Sands HAS the goods. And it has the business model to make it all work for both industry and shareholders.
And the biggest part of that is…Location-Location-Location. Their
deposit is 650 rail miles closer to the Big Shale Deposits in Texas—the
Permian Basin and the Eagle Ford.
Now, these two massive oil plays represent 38%, or 18.777 million tons,
of the total 49.7 million tons of proppant (another word for frac sand)
consumed in the entire USA in 2014. These are the basins to which SNS
is closest.
These are also the basins that are seeing the largest increase in frac
sand intensity—the amount used per horizontal well. Overall in the USA
it was up 27% per well, but in the Eagle Ford it was up 33%, and in the
Permian by 38% (Source: NavPort)
Commodities logistics firm PLG Consulting said that transportation and warehousing can account for nearly two-thirds
of the delivered price for frac sand. Being half again as close to
market gives the Sandtown deposit a huge leg up on its Wisconsin
competitors.
Select Sands estimate their sand can be delivered to the Eagle Ford for as much as $15-$20/ton cheaper, comparable Tier 1 sand from Wisconsin.
And of course, with a lower oil price producers are looking to scrape
costs to the bone—and Select Sands just threw them a bone.
While the rig count is now down some 50% from the peak of late 2014,
frac sand demand is expected to be down only 25%--with most of that drop
coming from lower quality sands. I expect Tier 1 sand to continue to
have a healthy market, though at slightly lower prices than 2014.
There are a couple other minor trends working in Select Sands’ favour.
One I mentioned earlier in the week—there is a big “fracklog” of wells
that have been drilled but not completed or fracked. That is low
hanging fruit for the industry if the oil price moves up.
The second is that a premium product--ceramic proppants—a more expensive
competitor to frack sand—are not being used as much now. That’s
creating some extra market share for Tier 1 sand.
Successful frac sand stocks are greatly rewarded by the Market. From
August 2013 to the peak in late 2014, the Market took the three largest
US frac sand suppliers to over 20x annualized cash flow at the peak.
Those three stocks (HCLP, SLCA and EMES) made investors 450%, 600% and 835% respectively over three years.
Junior stocks did even better—witness Canada’s own Athabasca Minerals (ABM-TSX) going from 25 cents to $3.20 in three years—a 1280% move.
Select Sands (SNS-TSXv)
has the potential to follow these stock charts. The asset is there.
The business opportunity is there. As management executes a simple
business plan, the Market will reward them and shareholders.
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