Improved hydraulic fracturing techniques have made it easier
to pull oil and natural gas out of the earth, as long as you have
the right ingredients to do the job.
One of those ingredients is high-purity silica sand, also
called frac sand. It is used in the fracturing (or "fracking")
process, which is a technique to pull petroleum fluids from shale
formations that don't have enough space for fluids to flow freely
to a well.
Because these formations aren't located near large frac sand
deposits, the sand has to be shipped in from elsewhere.
One of the companies that supplies the sand,U.S. Silica
Holdings (SCLA), has spent much of its time recently figuring out
how to get the sand to the formations as quickly and efficiently
U.S. Silica is the second largest domestic producer of
commercial silica, a mineral that was once mainly used to make
glass and other industrial products. Now, it's being used for
proppants in oil and gas extraction.
During the third quarter, oil and gas proppants accounted for
more than half of U.S. Silica's total sales. As recently as 2009,
proppants made up only 19% of sales.
One reason the percentage has grown is that U.S. Silica has
overhauled its storage infrastructure to make it easier for oil
producers to access its sand.
Sand For Pick Up
The company used to sell its silica sand at its plant, where
oil and gas customers would pick it up and transport it to their
wells. But that was a time-consuming process.
To help make it more efficient, U.S. Silica has located its
storage facilities closer to well sites.
"Mother Nature isn't kind," U.S. Silica Chief Executive Bryan
Shinn told IBD in a recent interview. "Our sand comes from
Illinois, Wisconsin and Minnesota. But the wells are in the
Dakotas, Texas and Pennsylvania."
To help address the problem, his company has taken a series of
steps to move sand closer to the wells.
In June, U.S. Silica signed a multi-year deal withCanadian
Pacific Railway (
) to ship frac from a new mining and processing facility U.S.
Silica is building in Sparta, Wis.
The facility will produce frac sand for use in shale basins in
the U.S. and Canada. It should be up and running next
Under the agreement, Canadian Pacific will become the
exclusive rail service provider at the Sparta plant for the
movement of U.S. Silica's frac sand to destination markets. The
facility will produce and ship three different grades of dry
Also in June, U.S. Silica Holdings announced an alliance with
BNSF Railway to build a new silica sand storage facility in San
Antonio, Tex., for use at the Eagle Ford shale.
The San Antonio facility is expected to store three to four
shipments a month of frac sand from U.S. Silica's Ottawa, Ill.,
sand mine. The shipments will include three different grades of
dry sand. They also will include resin coated proppants from U.S.
Silica's new facility in Rochelle, Ill., which is expected to be
fully operational in the first quarter of 2013.
In October, U.S. Silica announced an agreement with S.H. Bell,
a warehouse and distribution company, to open a new silica sand
storage facility to support oil and gas customers in the Utica
and Marcellus Shales in New York and surrounding states.
Under terms of that deal, U.S. Silica will ship barges and
railcars of premium Northern White frac sand to the new transload
facility in East Liverpool, Ohio, from its network of sand
The company's emphasis on oil and gas markets makes sense,
considering how much those markets have contributed to its recent
sales and earnings.
During the third quarter, oil and gas revenue came in at $64.5
million. That was up 166% from the prior year and accounted for
56% of total revenue.
The company sold 769,000 tons of sand into the oil and gas
services markets during the quarter, up from 459,000 tons a year
Those robust results provide "a striking contrast" to other
firms in the North American oil services market, Dahlman Rose
analyst Doug Garber said in a Q3 earnings report.
"We attribute the company's consistent results to
high-contract coverage; good management execution; low-cost,
high-quality white sand; and the build-out of
distribution/logistics capabilities," Garber noted.
Total revenue for the quarter rose 58% from the prior year to
$115.9 million. Earnings gained 89% to 36 cents a share, topping
Wall Street estimates of 33 cents.
The company's industrial and specialty products segment logged
Q3 revenue of $51.3 million, a year-over-year gain of 4%.
"U.S. Silica saw increasing demand in the industrial segment
from homebuilding-levered glass making customers during 3Q,"
noted Ole Slorer, analyst at Morgan Stanley.
Meanwhile, U.S. Silica's stock price has been trending higher
since bottoming out at 9.02 in late July. The stock debuted at 17
in February and went as high as 22.14 a month later before
slumping. Shares currently trade near 16.